You may feel that Warren Buffett is an extra ordinary man. That is just a myth. If you ever read any book that about his life, you may wonder how an ordinary person can turn an amount of $100,000 to $30 billions. Interested on his strategy?
Practically saying, it is very simple to understand and practice. It doesn’t require extra ordinary brain or out standing math skills. But, a person with common sense and above average math skills, can achieve this success if he understand and follow the strategy properly. Read what I understood from his investment strategy, here is the core.All his investments, that gave him enormous wealth, had made based on 3 basic points :
1. Business side considerations
Buffet was keen to know the business well prior to make any investment decisions. He never invested on any company where the business he was not able to understand. He never invested on any company from fast booming sectors like IT or construction. Instead, he selected companies engaged to traditional business with considerable year to year sales and profit growth.What idea he had used to understand the consistency of the company? He selected the company who’s product people always trusted and never able to live without. All the companies he had invested have there product with high durable competitive advantage. In plain word, the products have requirements from people all the time and company maintained its monopolistic status all the time.
2. Finance side considerations
He never bothers about the P/E ratio of a company or EPS (Earning Per Share) or Book Value. All these values can be manipulated using accounting numbers. Instead, he was keen to learn the following:• The return of equity. He was interested on any company which has consistent year to year ROE growth more than 19 to 20%.• He was not interested on any company that has huge debt. Instead, he looked for the companies have zero debt or very few but manageable debts.• He was keen to know the cash flow per share. An example, he never interested on any company that makes any product where the production cost of the same equals to its price. Instead, he interested on the companies who making products which has less manufacturing cost that not exceeding 10 to 25% of its price. Understanding the cash flow per share will give you better idea to analyze this.
3. Management side considerations
Buffet never interested on any company where the management was acting like bureaucrats. Instead, he was interested on a management which has efficiency to utilize its investors money properly and have innovative ideas to keep the monopolistic position of there business and product.Above 3 are the major points you should remember when following the Buffett Style. There are another valuation considerations than the above three, but all those deriving from these points only. In such, this three points are the heart of all investment decisions.
If you are a true follower of Buffett, never miss Warren Buffett’s Letters to Berkshire Shareholders, is an excellent source to know more about his style of thinking and hear the story of his success from his own mouth.
If there is any suggestions, feel free to express here.