If you go through any letters from the archives of ‘Warren Buffett’s Letters to Berkshire Shareholders’ in the Berkshire’s web site, you probably notice an advertisement for business wanted at the end of each letter. Buffet’s letters to shareholders are considered one of the best free resources to learn his investment methodology without spending a penny.
We hope to buy more businesses that are similar to the ones we have, and we can use some help. If you have a business that fits the following criteria, call me or, preferably, write.Here’s what we’re looking for:1) Large purchases (at least $10 million of after-tax earnings),2) Demonstrated consistent earning power (future projections are of little interest to us, nor are “turnaround” situations),3) Businesses earning good returns on equity while employing little or no debt,4) Management in place (we can’t supply it),5) Simple businesses (if there’s lots of technology, we won’t understand it),
6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).
If you want to follow Buffet Strategy to get the same success what he has received, this advertisement exposing his well followed investment strategies for you. Dear, it is clearly exposing the most required qualities of a company where he most believed. It is the most comprehensive collection ever available to an investor to learn his investment methodology. We will dig a little deep into each point in this advertisement to know the most important qualities he was expecting in a business to invest:
1. Large purchases (at least $10 million of after-tax earnings) – Buffet is a person who is totally against huge diversification. Also, he never practiced to put all his eggs to a single basket. As per him, a knowledgeable investor should not hold stocks more than he is able to manage. His best advice is to buy maximum stocks of a business, once after you found any business is really good to invest.
2. Demonstrated consistent earning power (future projections are of little interest to us, nor are “turnaround” situations) – Buffett never interested on the growth of EPS (Earning Per Share) or Book Value. All these can be manipulated by an accountant easily. Instead, he was keen to know the consistent y-o-y Return On shareholders Equity or ROE growth to identify the real earnings. As mentioned with lots of article receiving from net, the real ROE is not easy to find. It required lots of considerations on lots of factors. To get better awareness on how to identify the real ROE, buy and read “The interpretation of financial statements” from Benjamin Graham. This is an excellent guide that, teach you the required considerations to calculate the real ROE.
3. Businesses earning good returns on equity while employing little or no debt – I have already mentioned about ROE in previous line. Through the 3rd point, he is pointing to the importance of considering the debt status of a company. He never interested on any business that have huge debt. Instead, he went for those companies who have no debt or very few manageable debts.
4. Management in place (we can’t supply it) – A clear view on the importance of efficient management in place. Quality management always lead the business to success. If you go through the guide “The Warren Buffett Way” from Robert G. Hagstrom, you will get an excellent, clear idea on the Management imperative to the company.
5. Simple businesses (if there’s lots of technology, we won’t understand it) – Exposing Buffett’s most valuable advise to the investors, invest on any business that you can understand. He never choose internet companies to invest because of the complexity of its business model to understand. He advice investors to stick with your Circle of Competence. In his word, the Circle of competence would be “an investor’s best strategy is to select an area where they can know significantly more than the average investor, and focus their efforts on that area.”
6. An offering price – This point exposing his concept of buying price. He never brought any business if the price is not right. Instead, he patiently waits to get the price match to his expectation. But, he wait lot to get it in the right price and right time.
Whatever it is, this advertisement clearly exposing the major concepts on what he believed and became the corner stone of his success. Through practice with little common sense, an investor can follow him well and can get the same or more success what he got, using his strategies as the starting point.
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