Fundamentals - Warren Buffett Learned the Investment Strategy from
February 24th 2006
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
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
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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