Investing Strategy: Warren Buffett

Showing posts with label Warren Buffett. Show all posts

Buffett's Opinion on Calculation of Intrinsic Value

Try using Free cash flow.
Set a process for identifying future cash flows and based on that try to calculate intrinsic value of a company.

Read what is written by Warren Buffett in his letters to shareholders.

While writing about Calculation of Intrinsic value in the Owners manual Buffet says...

Intrinsic value is an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life.

The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, moreover — and this would apply even to Charlie and me — will almost inevitably come up with at least slightly different intrinsic value figures. That is one reason we never give you our estimates of intrinsic value. What our annual reports do supply, though, are the facts that we ourselves use to calculate this value.

Read owners manual on http://www.berkshirehathaway.com/

The Evolution of Warren Buffett as an Investor

The Evolution of Warren Buffett as an Investor
June 16th, 2011

Before Warren Buffett became Chairman and CEO of Berkshire Hathaway, he ran a successful investment partnership. But his style of investing was not always the same, it gradually evolved over time. His high school jobs consisted of varied ventures including selling golf balls and delivering papers. The money he saved from these jobs was invested in the stock market using different investment styles.

Perhaps trying to find the best style for himself, Buffett had read every book related to finance in the Omaha Public Library by the time he graduated college.

His investment style up to this point was wide ranging. He had studied many different techniques including odd-lot investing and technical analysis.

Buffett’s Investing Framework Takes Shape

In 1950 he came across a copy of The Intelligent Investor by Benjamin Graham, his future mentor at Columbia. This book had a dramatic effect on Buffett’s investment style.

Graham’s investment style could be seen on a deeper level in his other book, Security Analysis, which was co-authored by David Dodd.

Within Graham’s two books, an investing framework was outlined that would shape Buffett’s stock selection for the rest of his career.

Graham favored looking at a stock as a piece of a business. He viewed volatility more as an opportunity and less as a risk.

Working for Graham

While also a professor at Columbia, Graham ran the investment partnership Graham-Newman Corporation. Through his investment partnership he invested using the Net Current Asset Value formula to identify companies. Using this formula he was able to find companies selling for below an estimation of liquidation value.

In the early 1950s, Buffet was piggybacking off of Graham’s ideas with his own money.

Through his partnership, Graham would sometimes buy large stakes in companies to influence managements and join the board of directors. Some examples include investments in Northern Pipeline, Philadelphia and Reading Coal & Iron Company, and Marshall-Wells.

It was at the Marshall-Wells annual stockholder meeting that Buffett first met Walter Schloss, whom he would later be colleagues with. It wasn’t until 1954 that Buffet finally convinced Graham to hire him at Graham-Newman.

There, Buffet worked alongside Schloss in a spare room manually computing the liquidation value of companies. A signature trait of this investing was that little time was spent evaluating management. Buffet and Schloss merely filled out simple forms which would be used by Graham to make his investment decisions.

By ignoring the qualitative side, Graham’s method was largely quantitative.

The Early Partnership

After the Graham-Newman partnership was closed in 1956, Buffet formed his own investment partnership. He employed many of the same methods that he used while working for Graham.

Buffet followed in his mentor’s footsteps by buying companies selling below liquidation value and then proceeding to influence management. He did this with success at Sandborn Map, Dempster Mill Manufacturing, and Berkshire Hathaway.

The Birth of Berkshire Hathaway

Berkshire Hathaway did not start out as the conglomerate it is today, but as a textile mill selling below liquidation value. Buffett first began buying it in 1962 and by 1965 he had taken control of the company’s board and made himself Chairman.

During this time, Buffett’s investing style began to change again.

While he still favored buying companies that were selling below intrinsic value, how he came to a company‘s intrinsic value began to change.

While still managing his partnerships, Buffett was introduced to Charlie Munger. Munger felt better about buying a great business with high returns on capital than buying a struggling company selling below liquidation value.

Buffett’s Investing Style Today

Over time, Buffett and Munger both began to move further from the strict Graham approach and more towards buying great businesses. By placing a greater emphasis on the intrinsic value as determined by the operating company’s future cash flows (rather than the company’s assets) a company’s qualitative characteristics became more important.

Buffett views Phillip Fisher’s book Common Stocks and Uncommon Profits as the best guide to successful qualitative investing.

By 1970, Buffett’s partnerships had been wound down and Buffett concentrated his efforts on running Berkshire Hathaway.

Over the past 40 years Buffett has been able to combine the quantitative style of Graham with the qualitative style of Fisher, and in doing so has become arguably the greatest investor of all time.

About the Author: Daniel Rudewicz is a CFA charter holder and the managing member of the deep value investment company Furlong Financial, LLC. He will begin attending Georgetown Law in the evenings this fall. To contact him please send an email to dan@furlongfinancial.com .

http://www.oldschoolvalue.com/blog/featured/the-evolution-of-warren-buffett-as-an-investor/

7 Stock Investing Advices Warren Buffet Want You to Know

Good Stock Investing Advices

That All Beginners Need to Follow Religiously

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 maximise 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

It is not just about simplicity, but also something that you can understand. You must clearly define your circle of competence and stay where you are. It can be something that you learn while you are working or something that you spend time on to understand the business operation. To most, oil and gas business can be seen as so simple and yet very profitable, but to those who works in that industry will tell you, it is not as easy as what you think. 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 perform 30 years down the road; take into consideration the national economy, competition from others and change in customers’ lifestyle.

Stock Investing Advices #2: Wide Economic Moat

Simply said, the company should serve valuable niche market with price inelastic products or services. Warren Buffet himself avoids regulated industries, commodity businesses as well as capital intensive industries.

He prefers stocks which can finance their capital from operating cash flow with less borrowing as well as has strong pricing power. Meaning, the company can price their products as much as they want. 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).

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!

Stock Investing Advices #4: Excellent Capital Management

Every company that is listed in the stock market were entrusted to manage the business on behalf of their shareholders. Therefore, it is the managements’ duty to utilise the available resources for the highest possible return. To do this, they have to think and act like an owner and avoid the ‘institutional imperative’ style of management (think for themselves and don’t care what will happen 20 years down the road). When they don’t have the capability to create at least $1 value from $1 reinvestment, they should return the capital back to the shareholders by giving dividends or share buybacks.

Stock Investing Advices #5: Effective Management Team

Invest in company that have 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

Why ROE, and not the other financial ratios? Well, return on equity indicates how effective the management team convert 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

Once the good stocks have been identified, now is the time to buy them. To make sure every $1 investment will generate $2000 in just 30 years, Warren Buffet have to make sure he buys the stock at the lowest price possible. In the same time, he has to be real that not to set very low price till he misses the golden opportunity. Thus, he keeps himself buying the stocks when the prices are offered at pre-determined margin of safety. The margin of safety can be as low as 80 per cent discount from the calculated intrinsic value. 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.

http://www.stock-investment-made-easy.com/stock-investing-advices.html

Warren Buffet The Greatest Stock Market Investor

Warren Buffet
The Most Successful Stock Investor

Warren Buffet is undoubtedly the champion of all stock market investors. He is also referred to as the Oracle of Omaha, the town in which he resides in Nebraska.

Buffet's own 38 per cent stake in Berkshire Hathaway gives him a net worth of more than $36 billion, making him the second wealthiestman in the world; after Microsoft Tycoon, Bill Gates.

Unlike Peter Lynch,Buffet choose to live and work in a quiet city, staying away from from the hustle and bustle of Wall Street. According to record, he still lives in the modest house he bought for $31,500 40 years ago. He deliberately did this to keep away from the market. He does his own research and spends a lot of time thinking about his investment, just like any other discipline investors do.

He is so success that if you had put $1000 into Berkshire Hathaway back in 1965, you would have $5 million by now. Getting a staggering return of 42.6 per cent per year is not an easy job you know! He have been rewarded for being patient and thinking for long term.

"Stocks are simple. All you have to do is buying shares in a great business for less than the business worth, with respect to its management of the highest integrity and ability. Then you own those shares forever".

With early influence from his father, who was a stock broker, the young Warren Buffet started investing at an early age of about 11. He learnt that patience was a basic ingredient of successful investing and is a lesson not to be missed. Persuaded by his father to further his studies in investment, he met and worked for his mentor; Benjamin Graham "The Father of Modern Investment". It was Graham who got Buffet started in investing in a great way.

Warren Buffet was more interested in the company's management as a major factor when deciding to invest as opposed to the usual financial figures and statements. He would find the 'hidden gem' amongst the hay and accumulated his wealth patiently, and finally acquired Berkshire Hathaway. He has not sold a single share of this company, believing that the best place to invest is often at home.

"We emphasise in finding businesses that are predictable in a general way as to where they'll be in 10 or 15, or even 20 years".

Buffet preferred to invest in a boring but predictable industries, and bought the shares in an unexciting companies such as insurance, textile, food and beverage, of which he knew about firsthand. He had difficulty understanding technology stocks and had stayed away from them. As a result, his long term holdings in such stocks (e.g. Coca Cola, Gillette and American Express) yielded very handsome returns.

Most importantly, he was spared by the dot-com meltdown in 2000. Buffet's ability to make decisions that are often opposite to the general market, is what makes him so special. His discipline and rational thinking are what separated him from other stock investors.

And these are certainly the qualities that all investors wish to have.

http://www.stock-investment-made-easy.com/warren-buffet.html

Value Investing - Warren Buffett's Methodology

Warren Buffett's Methodology Warren Buffett descends from the Benjamin Graham school of value investing. He takes this value investing approach to another level. 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.

Brief summary Buffett's methodology:
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.

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.

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. 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. 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.

5. Do the company's products rely on a commodity?

Buffett 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 a commodity 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?

Buffett's most important skill is determining whether a company is undervalued. To do 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 to buy.

http://www.trade4rich.com/Buffett.html

Warren Buffett - The World's Greatest Money Maker

Warren Buffett - What is Franchise Value?

For the latest Warren Buffett, go to http://WarrenBuffettNews.com -

There is much less difference between buying a whole company and buying shares of a company. One difference is that you can change the managers much easier. But if you have to change the managers, then it probably isn't a business that you want to be in anyway. Another advantage to owning 100% is that you can decide how to allocate the excess capital. You can't do that if you only own 5%. At Berkshire, the game is to try to figure out where to put capital.

Most managers like to grow. They prefer to grow intelligently, but if they can't do that they will try other methods. In the banking industry, they measure themselves by size of their balance sheets, not by profits. Banks don't necessarily have economies of scale beyond a certain point. It is much better to have a large competitive advantage in a smaller market. There isn't much advantage to shareholders for the banks that they own to expand.

Gillette makes about 2/3 of its money outside of the United States. Companies that can do well in international markets are great. Depending on the different countries they are in, there are many factors that can be better or worse because of tax rates or public opinion. A good business can be found anywhere, but it is easier in the United States if you understand the economy and the business landscape a bit better.

Franchise value is what a brand has if a customer will leave a store if they don't carry the brand. They would rather walk across the street and pay a nickle more than to buy another brand. That is franchise value, and it is very valuable. It is wholly in the customer's mind. If you've got the right product in that way, you may be paying for taste or something else. The second thing to think about is how durable that franchise value is.