Tips from the Oracle of Omaha:
- Four things count when making an investment: a business you understand, favorable long-term economics, able and trustworthy management, and a sensible price-tag. That’s investment everything else is speculation.
- His biggest investments are American Express, Wells Fargo, Proctor and Gamble, and Coca-Cola. “Start-ups are not our game.”
More to come…
Buffett’s criteria for “wonderful businesses” include, among others, the following:
- They have a good return on capital without a lot of debt.
- They are understandable.
- They see their profits in cash flow.
- They have strong franchises and, therefore, freedom to price.
- They don’t take a genius to run.
- Their earnings are predictable.
- The management is owner-oriented.
- Has the company performed well? Look at company’s Return on Equity (ROE) for the last 5-10 years to determine how well it performs. ROE = net income/shareholder equity.
- Has the company avoided excess debt? Buffet looks for a low amount of debt. = Total liability/shareholder equity.
- Are profit margins high? Are they increasing? Margin = net income/net sales.
- How long has the company been public? Buffet only invest in company’s he understands. He only invests in companies that have been around for 10 years. He looks for companies that have stood the test of time, but are undervalued.
- Do the company’s product rely on a commodity? If a company has a distinguishable advantage over other companies, he will invest in it.
- Is the stock selling at 25% to its real value? To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company’s intrinsic value is usually higher (and more complicated) than its liquidation value – what a company would be worth if it were broken up and sold today. The liquidation value doesn’t include intangibles such as the value of a brand name, which is not directly stated on the financial statements. Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization – the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company’s market capitalization, Buffett sees the company as one that has value.
“If, when making a stock investment, you’re not considering holding it at least ten years, don’t waste more than ten minutes considering it.”
“Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.”
“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
“In the short term the market is a popularity contest; in the long term it is a weighing machine.”