The Big Four – Principles in investing
do not change.
1975 2006
Market price per share $100 $109,000
Per share investments: $159 $80,636
Pre-tax earnings per share: $4 $3,625
In 1977, Warren Buffett laid out
his investment philosophy in his letter to the shareholders.
We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.
In 2007 on CNBC – The Billionaire
next door. Warren Buffett reiterated the
big four. 30 years later the principles remain the same.
1.
Something he can understand. Something in his “circle of competence”.
He doesn’t understand what Car Company, software or chemical
company will win 10 years from now. But
he does understand that Snicker’s Bar will be the number one candy bar in the
U.S. just as it has been for the last 40 years.
2.
Durable Competitive Advantage
A business that will dominate for what appears to be forever.
3.
An Honest and Able management.
4.
A price that he wants to pay.
Others interpretation of Buffett’s
investment principles:
From: The Warren Buffett Way by Robert G.
Hagstrom
Business Tenets
1.
Is the business simple and understandable from your
perspective as an investor?
2.
Does the business have a consistent operating history?
3.
Does the business have favorable long-term prospects?
Management Tenets
1.
Is management rational?
2.
Is management candid with its shareholders?
3.
Does management resist the institutional imperative?
Financial Tenets
1.
Focus on return on equity, not earnings per share.
2.
Calculate “Owner Earnings”.
3.
Search for companies with high profit margins.
4.
For every dollar of retained earnings, has the company
created at least one dollar’s extra market value?
Value Tenets
1.
What is the value of the business?
2.
Can the business currently be purchased at a
significant discount to its value?
From: How to Build Wealth Like Warren Buffett
by Robert P. Miles
There’s four areas of interest when
Warren
1. Business
a. Is
it simple?
2. Management
a. Are
they candid?
b. What
are their expansion plans?
c. Are
they fanatics?
3. Financials
a. Is
it a high profit margin business?
b. What
is its return on equity?
4. Market
Price
a. What
is the business value and can it be purchased at a discount to intrinsic value?
— ValueWalk (@valuewalk) October 24, 2016
