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Value Investing Fundamentals - Warren Buffett Learned the Investment Strategy from Benjamin Graham

February 24th 2006

Value Investing Fundamentals - Warren Buffett Learned the Investment Strategy from Benjamin Graham

Warren Buffett

Most investors know who Warren Buffett is.  He is the billionaire investor from Omaha Nebraska that sits down with a pen and paper to fill out his IRS tax forms by hand.  He likes to invest in companies he understands.  He expects to hold on to his investments for a long period of time. 

Buffett is considered a “value investor”, and was influenced heavily by his Columbia University professor Benjamin Graham (1894 – 1976).  Buffett credits Graham with giving him his grounding and a sound intellectual framework for investing. 

Value investors look for stocks that are unjustifiably under-priced.  This is done by analyzing the fundamentals to find out what the “intrinsic worth” of the company is.  This value is often overlooked by investors. 

 

Warren Buffett is not concerned with the day to day activities of the stock market per se.  Neither is he concerned with the supply and demand intricacies of the stock market.  He said “In the short term the market is a popularity contest; in the long term it is a weighing machine." 

He is very interested in earnings, and less interested in capital gain.  According to an article in Investopedia, when “Buffett invests in a company, he isn't concerned with whether the market will eventually recognize its worth; he is concerned with how well that company can make money as a business.”

Warren Buffett looks for companies that performs consistently well while avoiding excess debt.  The debt / equity ratio is calculated by dividing Total Liabilities / Shareholders' Equity.  Warren is also interested in the profit margin trend.  This is the rate of increase of profit.   

 

He pays attention to the management of the company.  Warren studies the company’s leaders and looks for honest people.  He likes companies that have been around for a long time and stays away from companies he does not fully understand. 

Value is extremely important.  Is the company stock selling for 75% of its value?  This is critical.  If the company meets the other criteria but fails in this one, he will likely pass it up.  He analyzes the intrinsic value of the company’s assets, earnings and revenue.  What would the company be worth if it were broken up and sold?  He compares this calculated worth with the overall company market capitalization.  If the value – market capitalization ratio is substantial enough, and the company meets his other criteria, he might make the investment.

 
 
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By Dan Wilson
Best Syndication Staff Writer

Books on Investing

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Copyright 2005 Best Syndication                                     Last Updated Saturday, July 10, 2010 09:48 PM