THE WARREN BUFFETT WAY
Today, we shall dig in a little deeper and study the ‘how’ and ‘why’ on the selections of stocks which path Warren Buffett’s way to his remarkable record of success
Let’s look at THE WARREN BUFFETT WAY by Robert G. Hagstrom. In this book, he describes the investment strategies and techniques used by Warren Buffett to realize enormous success as a professional investor
Basically, the decision for Warren Buffett to invest in a business is based on:
1. Business Tenets
2. Management Tenets
3. Financial Tenets
4. Value Tenets
The most prominent trait of Buffett’s investment philosophy is the prominent understanding that by owning shares of stocks, he owns the businesses. According to Buffett, the nine most important words ever written about investing is “Investing is most intelligent when it is most business-like”
Buffett selections of stocks boils down to three main areas which he subconsciously apply when investing
1. Is the business simple and understandable?
2. Does the business have a consistent operating history?
3. Does the business have favourable long term prospect?
One of the highly considered factors when investing is the quality of management. A successful company comes from a competent management team. A good management behaves and think like an owner of the company. Its core objective is to increase the shareholder value and make rational decisions to the benefits of the company
1. Is the management rational?
2. Is the management candid with the shareholders?
3. Does the management resist the institutional imperative?
1. Focus on return on equity, not earnings per share
2. Calculate “owners earnings”
3. Look for companies with high profit margins
4. For every dollar retained, has the company created at least a dollar of market value?
The idea is to purchase only when the current market price is at a significant discount to value. The difference between estimated value and price provides investors margin of safety
Basically, investment in stocks can be summarized in one sentence: Find great companies with favourable long term prospect that are run by honest and competent people and are selling for less than they are worth.
It sounds simple but it’s not easy to find those great companies that fit every criteria. It takes time and effort!
“The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do” Warren Buffett