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Warren Buffett's Investment approach
Buffett's philosophy on business investing is a modification of thevalue investing approach of his mentor Benjamin Graham. Graham boughtcompanies because they were cheap compared to their intrinsic value. Hewas of the belief that as long as the market undervalued them relativeto their intrinsic value he was making a solid investment. He reasonedthat the market will eventually realize it has undervalued the companyand will correct its course regardless of what type of business thecompany was in. In addition he believes that the business has to have solid economics behind it.
The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
* Is the company in an industry of good economics, i.e., not anindustry competing on price points. Does the company have a consumermonopoly or brand name that commands loyalty? Can any company with anabundance of resources compete successfully with the company?
* Are the Owner Earnings on an upward trend with good and consistent margins?
* Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings arelower than average?
* Does the company have high and consistent Returns on Invested Capital (his version differs from the popular definition)?
* Does the company retain earnings for growth?
* The business should not have high maintenance cost of operations, lowcapital expenditure or investment cash outflow. This is not the same asinvesting to expand capacity.
* Does the company reinvest earnings in good business opportunities?Does management have a good track record of profiting from theseinvestments?
* Is the company free to adjust prices for inflation?
Buffett's next concern would be when to buy. He does not hurry toinvest in businesses with indiscernible value. He will wait for marketcorrections or downturns to buy solid businesses at reasonable prices,since stock-market downturns present buying opportunities.
He is known for being conservative when speculation is rampant in themarket and being aggressive when others are fearing for their capital.This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential opportunities during the same period.
Then he asks at what price is the business a bargain, and his answertypically is when it provides a higher rate of compounded returnrelative to other available investment opportunities.
Buffett has coined the term "economic moat," preferring to acquirecompanies that possess sustainable competitive advantages over their competitors.
Buffett's philosophy on business investing is a modification of thevalue investing approach of his mentor Benjamin Graham. Graham boughtcompanies because they were cheap compared to their intrinsic value. Hewas of the belief that as long as the market undervalued them relativeto their intrinsic value he was making a solid investment. He reasonedthat the market will eventually realize it has undervalued the companyand will correct its course regardless of what type of business thecompany was in. In addition he believes that the business has to have solid economics behind it.
The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:
* Is the company in an industry of good economics, i.e., not anindustry competing on price points. Does the company have a consumermonopoly or brand name that commands loyalty? Can any company with anabundance of resources compete successfully with the company?
* Are the Owner Earnings on an upward trend with good and consistent margins?
* Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings arelower than average?
* Does the company have high and consistent Returns on Invested Capital (his version differs from the popular definition)?
* Does the company retain earnings for growth?
* The business should not have high maintenance cost of operations, lowcapital expenditure or investment cash outflow. This is not the same asinvesting to expand capacity.
* Does the company reinvest earnings in good business opportunities?Does management have a good track record of profiting from theseinvestments?
* Is the company free to adjust prices for inflation?
Buffett's next concern would be when to buy. He does not hurry toinvest in businesses with indiscernible value. He will wait for marketcorrections or downturns to buy solid businesses at reasonable prices,since stock-market downturns present buying opportunities.
He is known for being conservative when speculation is rampant in themarket and being aggressive when others are fearing for their capital.This contrarian strategy is what led Buffett's company through the Internet boom and bust without significant damage, although critics have also noted that it may have led Berkshire to miss out on potential opportunities during the same period.
Then he asks at what price is the business a bargain, and his answertypically is when it provides a higher rate of compounded returnrelative to other available investment opportunities.
Buffett has coined the term "economic moat," preferring to acquirecompanies that possess sustainable competitive advantages over their competitors.
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