"If a business does well, the stock eventually follows.” Warren Buffett
Warren Buffett, a billionaire investor, businessperson and philanthropist. Warren Buffett, the man, is just as hard to define as Warren Buffett, the investor. He projects a down-to-earth prudence but one suspects that he plays his personality as close to the chest as he does his investment secrets. Behind Bill Gates, he is well known as the second or third richest man in the world.
As a boy, irrespective of his family background, he delivered newspapers to make extra money and this probably sparked his interest in the media where he has made several successful investments including the Washington Post Company, a stock that has made him a lot of money and which he vows never to sell.
His everlasting attitude of value investing has proven relevant and profitable in all types of markets and financial environments, and has never gone out of style. Following his simple strategies, he has built the holding company Berkshire Hathaway to a powerhouse with a market value of $196 billion. As the largest shareholder and CEO, his net worth is about $52 billion. Warren Buffett has made his reputation as the "world's greatest investor" by taking the longer view, buying quality stocks with good earnings power and staying with them through stock markets.
Discovery of Berkshire Hathaway
The decisive moment in his career was Berkshire Hathaway, a large textile company in a depressed industry, whose shares were selling for less than its working capital. He began purchasing its shares in 1962, and eventually dissolved his partnerships to run Berkshire Hathaway. He used the Berkshire cash flow to purchase private businesses and the stock of public companies. Eventually, he sold off the worsening textile operations and converted Berkshire Hathaway to an investment holding company. His early focus was on acquiring insurance companies, which invest large cash reserves to pay future claims.
Warren Buffett's Investment PrinciplesWarren Buffett does not readily disclose the investments
He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this.
Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business
1. The company should be soundly managed. Tests of good management include:
Share buybacks
Good use of retained earnings
Sticking to what you know
2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
Company growth
Dealing with inflation
Capital expenditure
Look through earnings
Brand names
3. The company should have consistently high returns. Warren Buffett would look at both:
Returns on equity
Returns on capital
4. The company should have a prudent approach to debt.
5. The businesses of the company should be simple and the investor should have an understanding of the company.
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6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
Price/earnings ratios
Earnings and Dividend yields
Book value
Comparative rates of return
8. Investors need to take a long term approach
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