Warren Buffett How He Does It

Highlights from Investopedia Article

Warren Buffett How He Does It

Highlights by David Willden

Example of questions Buffett asks himself: 

Performance?

Has the company consistently performed well?

  • Have the profit margins been high over the years?    Are they increasing?
  • What is return on equity for the firm over the last several years?
  • Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.   (source)
  • Has the company avoided excess debt?
  • What is the debt to equity ratio?  (Total Liabilities / Shareholders’ Equity)

Competitive Advantage?

  • Buffett focuses on firms that have a competitive advantage.   Any characteristic that is hard to replicate is what he calls a company’s economic moat, or competitive advantage.   The wider the moat, the tougher it is for a competitor to gain market share.
  • Buffett shies away from companies whose products are indistinguishable from those of competitors and those that rely solely on a commodity (e.g., oil, gas) Warren Buffett – How He Does It 


Longevity?

  • How old is the company?
  • How long has the company been public?


Understanding?

Does Buffett fully understand the business?


Good Deal?

  • Is the stock selling at a 25% discount to its real value?
  • The investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets.   What makes Buffett special is his ability to accurately determine a firms intrinsic value
  • And a company’s intrinsic value is usually higher 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.

Warren Buffett: How He Does It.   We look at the Sage of Omaha’s methodology for evaluating value stocks.


Warren Buffett How He Does It

Warren Buffett How He Does It