Showing posts with label Buffett Powerful Philosophy for Investing. Show all posts
Showing posts with label Buffett Powerful Philosophy for Investing. Show all posts

The Investment Philosophy of Warren Buffett - In 23 Quotes

Warren Buffett is the most successful investor of our time, perhaps of any time. He is famous for his pithy quotes, which often appear in his annual letter to shareholders.


Taken together, his quotes pretty well sum up his investment philosophy and approach. Here are his best sound bites of all time on being a sensible investor.
1. Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
2. Investing is laying out money now to get more money back in the future.
3. Never invest in a business you cannot understand.
4. I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.
5. I put heavy weight on certainty. It's not risky to buy securities at a fraction of what they're worth.
6. If a business does well, the stock eventually follows.
7. It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
8. Time is the friend of the wonderful company, the enemy of the mediocre.
9. For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
10. In the short run, the market is a voting machine. In the long run, it's a weighing machine.
11. The most common cause of low prices is pessimism. We want to do business in such an environment, not because we like pessimism, but because we like the prices it produces. It's optimism that is the enemy of the rational buyer. None of this means, however, that a business or stock is an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling.
12. Risk comes from not knowing what you're doing.
13. It is better to be approximately right than precisely wrong.
14. All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.
15. Wide diversification is only required when investors do not understand what they are doing.
16. You do things when the opportunities come along. I have had periods in my life when I have had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.
17. [On the dot-com bubble:] What we learn from history is that people don't learn from history.
18. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.
19. You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.
20. You should invest in a business that even a fool can run, because someday a fool will.
21. When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.
22. The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.
23. Diversification may preserve wealth, but concentration builds wealth.


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What is Warren Buffett's investing philosophy?

Buffett's investment philosophy has changed over time and can generally be thought of in two parts:


  • Early Buffett (pre-1970): buy at a significant discount to intrinsic value. "Fair business at a wonderful price."
  • Late Buffett (post-1970): buy companies at a price at or near intrinsic value, that can consistently increase their intrinsic value,.  "Wonderful business at a fair price."

He has said that the latter philosophy is far superior to the former and that it took him far too long to realize it.  Buffett's investment philosophy certainly evolved over the course of his investing lifetime, and did shift towards more of a focus on quality rather than cheapness, in part due to his association with and learning from his business partner Charlie Munger.  The intellectual father - the "Benjamin Graham," if you will - of this quality focus was Phil Fisher.  Generally, Buffett is a value investor; he studied under and worked for Benjamin Graham, the author of The Intelligent Investor and Security Analysis and the man generally considered the father of modern-day value investing, and credits Graham for much of his investment philosophy and success.


The best way to truly understand Buffett's investment philosophy is to read the following (links below):
1. His letters to investors from his early investment partnerships
2. His letters to shareholders of Berkshire Hathaway
3. The Intelligent Investor by Benjamin Graham
4. Common Stocks and Uncommon Profits by Phil Fisher


Early Partnership Letters (1959-1969):

Berkshire Hathaway Letters (1977-2010):


Intelligent Investor:


Common Stocks and Uncommon Profits:

http://www.quora.com/Warren-Buffett/What-is-Warren-Buffetts-investing-philosophy

WARREN BUFFETT'S INVESTMENT PRINCIPLES

Warren Buffett does not readily disclose the investments he makes on behalf of himself or Berkshire Hathaway. He does, every year, report on the substantial holdings of his company in other corporations. These provide only tiny clues however to why, when and where he invests.


He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this.


Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business – the Benjamin Graham approach:


1. The company should be soundly managed. Tests of good management include:
2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
3. The company should have consistently high returns. Warren Buffett would look at both:
4. The company should have a prudent approach to debt.

5. The businesses of the company should be simple and the investor should have an understanding of the company.  See case studies

6. Assuming that all these thresholds are satisfied, the investment should only be made at areasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
7. Investors need to take a long term approach.


Warren Buffett: How He Does It

April 22 2005


Did you know that a $10,000 investment in Berkshire Hathaway in 1965, the year Warren Buffett took control of it, would grow to be worth nearly $30 million by 2005? By comparison, $10,000 in the S&P 500 would have grown to only about $500,000. Whether you like him or not, Buffett's investment strategy is arguably the most successful ever. With a sustained compound return this high for this long, it's no wonder Buffett's legend has swelled to mythical proportions. But how the heck did he do it? In this article, we'll introduce you to some of the most important tenets of Buffett's investment philosophy. (For more on Warren Buffett and his current holdings, check out Coattail Investor.)

Buffett's Philosophy 
Warren Buffett descends from the Benjamin Graham school of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth. When discussing stocks, determining intrinsic value can be a bit tricky as there is no universally accepted way to obtain this figure. Most often intrinsic worth is estimated by analyzing a company's fundamentals. Like bargain hunters, value investors seek products that are beneficial and of high quality but underpriced. In other words, the value investor searches for stocks that he or she believes are undervalued by the market. Like the bargain hunter, the value investor tries to find those items that are valuable but not recognized as such by the majority of other buyers. 

Warren Buffett takes this value investing approach to another level. Many value investors aren't supporters of the efficient market hypothesis, but they do trust that the market will eventually start to favor those quality stocks that were, for a time, undervalued. Buffett, however, doesn't think in these terms. He isn't concerned with the supply and demand intricacies of the stock market. In fact, he's not really concerned with the activities of the stock market at all. This is the implication this paraphrase of his famous quote : "In the short term the market is a popularity contest; in the long term it is a weighing machine."(see What Is Warren Buffett's Investing Style?) 

He chooses stocks solely on the basis of their overall potential as a company - he looks at each as a whole. Holding these stocks as a long-term play, Buffett seeks not capital gain but ownership in quality companies extremely capable of generating earnings. 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. 



Buffett's Methodology Here we look at how Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price. Keep in mind that these are not the only things he analyzes but rather a brief summary of what Buffett looks for: 

1. Has the company consistently performed well? 
Sometimes return on equity (ROE) is referred to as "stockholder's return on investment". It reveals the rate at which shareholders are earning income on their shares. Buffett always looks at ROE to see whether or not a company has consistently performed well in comparison to other companies in the same industry. ROE is calculated as follows: 
= Net Income / Shareholder's Equity


Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to get a good idea of historical performance. 

2. Has the company avoided excess debt? 
The debt/equity ratio is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money. The debt/equity ratio is calculated as follows: 
= Total Liabilities / Shareholders' Equity


This ratio shows the proportion of equity and debt the company is using to finance its assets, and the higher the ratio, the more debt - rather than equity - is financing the company. A high level of debt compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above. 

3. Are profit margins high? Are they increasing? 
The profitability of a company depends not only on having a good profit margin but also on consistently increasing this profit margin. This margin is calculated by dividing net income by net sales. To get a good indication of historical profit margins, investors should look back at least five years. A high profit margin indicates the company is executing its business well, but increasing margins means management has been extremely efficient and successful at controlling expenses. 

4. How long has the company been public? 
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their initial public offerings (IPOs) in the past decade wouldn't get on Buffett's radar (not to mention the fact that Buffett will invest only in a business that he fully understands, and he admittedly does not understand what a lot of today's technology companies actually do). It makes sense that one of Buffet's criteria is longevity: value investing means looking at companies that have stood the test of time but are currently undervalued. 

Never underestimate the value of historical performance, which demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that the past performance of a stock does not guarantee future performance - the job of the value investor is to determine how well the company can perform as well as it did in the past. Determining this is inherently tricky, but evidently Buffett is very good at it. 

5. Do the company's products rely on a commodity? 
Initially you might think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on acommodity such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share. 

6. Is the stock selling at a 25% discount to its real value? 
This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing, and Buffett's most important skill. To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements. 

Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value. Sounds easy, doesn't it? Well, Buffett's success, however, depends on his unmatched skill in accurately determining this intrinsic value. While we can outline some of his criteria, we have no way of knowing exactly how he gained such precise mastery of calculating value. (To learn more about the value investing strategy of selecting stocks, check out our Guide To Stock-Picking Strategies.) 

Conclusion 
As you have probably noticed, Buffett's investing style, like the shopping style of a bargain hunter, reflects a practical, down-to-earth attitude. Buffett maintains this attitude in other areas of his life: he doesn't live in a huge house, he doesn't collect cars and he doesn't take a limousine to work. The value-investing style is not without its critics, but whether you support Buffett or not, the proof is in the pudding. As of 2004, he holds the title of the second-richest man in the world, with a net worth of more $40 billion (Forbes 2004). Do note that the most difficult thing for any value investor, including Buffett, is in accurately determining a company's intrinsic value.

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7 Important Stock Investing Advice from Warren Buffett!


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Summarized Overview

In this article, you’ll find information on the stock investing ideas that Warren Buffet wants all stock investors to know, strategy he uses to maximize return, price of stocks that he willing to pay, key financial ratio that is so important to him, type of managers he loves, and kind of management he trusts.

7 Stock Investing Advices for Beginners

This stock market investing advice will help you on how to pick stocks Warren Buffet way.

Stock Investing Advices #1: Simple Business Model

You must understand the business itself or at least like and use it. Warren Buffett likes to patronize/use Nike, Coke and Gillette products and he is a believer of his investments. Have time to read and study the business model and the financial reports that takes only 2-3 hours per day. Invest as if you will buy the business.

Do you know why this is so important?

When come to investing, predicting what will happen tomorrow is something that you can’t live without. Forecasting what the future will be is the only way you can estimate how much return you’ll be getting later on. So, if you really understand the business inside out, you can project how the company performs 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Most companies here in Philippines have investor relation’s page in their websites where you can browse their financial reports.

Stock Investing Advices #2: Wide Economic Moat

In simple terms, it must dominate its market and can somehow dictate its product’s prices. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries. Look out Nike, it has its own market around the world and it can dictate its own product prices regardless of its competition because people buy Nike for its brand. Further, company should finance its capital from operating cash flow and not depending on borrowings. That is why, Warren Buffet love ‘franchise’, for example, Furniture Mart (the lowest cost in the industry), The Washington Post (market dominance and leader), Coke (strong brand name) and Candies (premium priced and high quality products that serve niche market).

How about Jollibee or Meralco here in our country?

Stock Investing Advices #3: Sustainable Growth

Serving the existing niche market is not enough. Instead, Warren Buffet wants the company to grow continuously and exponentially. Therefore, he looks for managements that have the ability to widen their economic moat consistently over the past years. Their businesses must be positioned where the demand able to grow continuously; Gillette is his best example. In the same time, always be ready for any possible trouble to the business, and most importantly back up your investment plan!

Have you heard of the recent plans of San Miguel Corporation and Metro Pacific Investment Corporation?

Stock Investing Advices #4: Excellent Capital Management

The Management should utilize the available resources for the highest return to the company and to its shareholders. Shareholders should be benefited for their investments thru dividends. Management carries the trust of the shareholders, thus, they should act and think as owners too. Moreover, it is better if the management holds a huge number of stocks too, since they will act as true owners and will not think short term but instead, will make sure that the company earns in the next 20 years or more!

Stock Investing Advices #5: Effective Management Team

Invest in company that has honest and capable managers. They should be so capable that Warren Buffet himself admires the way the managers do things. In Berkshire Hathaway Annual Meeting year 2000, he once said, “we want managers who tell the truth and tell themselves the truth, which is more important”. He loves cost conscious and frugal type of managers who are honest and integrity as well.

Stock Investing Advices #6: Superior ROE

The general rule that it is above 15! Why ROE, and not the other financial ratios? Well,return on equity indicates how effective the management team converts the reinvested money into cash. The higher the return, the more profitably the company can reinvest its earnings. The faster the company able to turn the reinvested earnings into profits, the faster its value increases from one year to another. And mind you, it is a big challenge to the management to consistently create value for every penny they spend. To prove this, not many stocks that has 15 per cent ROE consistently for the past 20 or 30 years, worldwide.

Stock Investing Advices #7: Buy at Discount Price

After the process of selection, now is the time to buy them! But of course make sure it is below the intrinsic value and you must have the margin safety of 80% discount from the calculated intrinsic value. Warren Buffet has to make sure he buys the stock at the lowest price possible. Have you heard the recent investment of Mr. Buffett on IBM and in these times of Euro and US Debt Crisis? In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Even if the stocks are so profitable but the price is too high, he will just passes the opportunity to somebody else.

If you want to be as successful as Warren Buffet in stock investing, study each point thoroughly. Ignoring either one advice is enough to make you broke in stock market; simply because, in stock investing, due diligence counts.

Intentionally not following the advice proves that you are not ready for investing;perhaps you are just looking for fast cash.



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