From buying cheap companies at lower prices to purchase good companies at a fair price.
Investors worldwide have praised Warren Buffett’s ability to cherry-pick winning stock and companies over the last 50+years. Buffet has a net worth of $100.6 billion as of yesterday (29 Sep 2021), according to Forbes.com.
In his investing career, he has resisted the temptation to pour all his money into the next big thing of the future. He has used his immense wealth to contribute to the good of society by donating more than $41 billion to charitable causes.
With his indomitable ability to uncover companies’ long-term prospects, many investors would love to replicate what he looks for in a company before adding that to his portfolio.
Some of Warren Buffett’s well-known pointers for investing are mentioned heaps of time in his annual shareholder letter.
- His research for his next investment begins with his philosophy of value investing.
- Buffett looks for companies that can provide a good return on equity over many years in future.
- The company doesn’t have many rivals in the industry. If it does, what makes that company stand out from its competitors (Moat)
- He analyses the company’s profit margin to make sure it has room to maneuver, have a healthy profit margin, and can grow.
- He focuses on undervalued companies that he can buy at a good discount.
His approach to value investing —
Buffett follows the value investing principles laid out by his mentor Ben Graham. He built his company, Berkshire Hathaway, based on value investing principles. Value investing looks at the underlying value of a company’s assets rather than looking at a chart and patterns to make the decision and determining the intrinsic value of the company by looking at its financial statement, debt ratios and growth rate.
Company’s past performance —
Companies that have been providing positive returns over the last many years and have steadily increased the rate at which they grow are more desirable than those with no past performance (new companies) to base the decision. When looking at the ROE of a company, it is imperative to examine the ROE of the company’s top competitor in the same sector.
Debt to equity ratio —
Having a large debt to equity ratio in a company is a massive red flag as most of the profit and ROE goes towards paying the interest obligation of the debt, especially when growth is only coming by adding on more debt.
If a company has positive shareholder equity, it doesn’t rely on debt to stay in business. Instead, Buffett prefers that most of the returns come from shareholder’s equity. For Buffett, low debt and high shareholder’s equity are two critical components to picking a good company.
Profit margin —
Buffet looks for companies with a good profit margin and a steady customer base while keeping their operating costs moderately low. In the case of ROE, he examines the profit margin of the last several years to discount the trends and operating costs.
what is unique about the company (what is its MOAT) —
Buffett looks for companies that are unique in their way, have something or products that are hard for its competitors to replicate. Like Coka-Cola and Apple have their brand and reputation, it is near impossible for competitors in their field to have the same importance. Companies can copy the simplicity and elegance that Apple is built on, but competitors can’t take the brand identity.
These are some of the essential criteria followed by Buffett that help him make investing decisions. Beyond his investing style, Buffet is also known as buy and hold investor. When Buffett buys a stock, his selling period never and holding period is forever. He is not interested in selling stock in the short term as it increases his expense ratio and incurs capital gains tax.
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