Warren Buffett
KEY TAKEAWAYS
- Buffett follows the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic worth.
- Rather than focus supply and demand intricacies of the stock market, Buffett looks at companies as a whole.
- Some of the factors Buffett considers are company performance, company debt, and profit margins.
- Other considerations for value investors like Buffett include whether companies are public, how reliant they are on commodities, and how cheap they are.
Buffett: A Brief History
Warren Buffett was born in Omaha in 1930. He developed an interest in the business world and investing at an early age including in the stock market. Buffett started his education at the Wharton School at the University of Pennsylvania before moving back to go to the University of Nebraska, where he received an undergraduate degree in business administration. Buffett later went to the Columbia Business School where he earned his graduate degree in economics.
Warren Buffett: How He Does It
Who hasn't heard of Warren Buffett—one of the world's richest people, consistently ranking high on Forbes' list of billionaires? His net worth was listed at $80 billion as of Oct. 2020.1 Buffett is known as a business man and philanthropist. But he's probably best known for being one of the world's most successful investors. Which is why it's not surprising that Warren Buffett's investment strategy has reached mythical proportions. Buffett follows several important tenets and an investment philosophy that is widely followed around the globe. So just what are the secrets to his success? Read on to find out more about Buffett's strategy and how he's managed to amass such a fortune from his investments.
KEY TAKEAWAYS
- Buffett follows the Benjamin Graham school of value investing, which looks for securities whose prices are unjustifiably low based on their intrinsic worth.
- Rather than focus supply and demand intricacies of the stock market, Buffett looks at companies as a whole.
- Some of the factors Buffett considers are company performance, company debt, and profit margins.
- Other considerations for value investors like Buffett include whether companies are public, how reliant they are on commodities, and how cheap they are.
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Alison Czinkota / Investopedia
Buffett: A Brief History
Warren Buffett was born in Omaha in 1930. He developed an interest in the business world and investing at an early age including in the stock market. Buffett started his education at the Wharton School at the University of Pennsylvania before moving back to go to the University of Nebraska, where he received an undergraduate degree in business administration. Buffett later went to the Columbia Business School where he earned his graduate degree in economics.
Buffett's Philosophy
Buffett follows the Benjamin Grahamschool of value investing. Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth. There isn't a universally accepted way to determine intrinsic worth, but it's most often estimated by analyzing a company's fundamentals. Like bargain hunters, the value investor searches for stocks believed to be undervalued by the market, or stocks that are valuable but not recognized by the majority of other buyers.
Buffett takes this value investing approach to another level. Many value investors do not support the efficient market hypothesis (EMH). This theory suggests that stocks always trade at their fair value, which makes it harder for investors to either buy stocks that are undervalued or sell them at inflated prices. They do trust that the market will eventually start to favor those quality stocks that were, for a time, undervalued.
Investors like Buffett trust that the market will eventually favor quality stocks that were undervalued for a certain time.Buffett, however, 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 in his famous paraphrase of a Benjamin Graham quote: "In the short run, the market is a voting machine but in the long run it is a weighing machine."6
He looks at each company as a whole, so he chooses stocks solely based on their overall potential as a company. Holding these stocks as a long-term play, Buffett doesn't seek 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.
Warren 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.7 Keep in mind these are not the only things he analyzes, but rather, a brief summary of what he looks for in his investment approach.
1. Company Performance
Sometimes return on equity (ROE) is referred to as stockholder's return on investment. It reveals the rate at which shareholders earn income on their shares. Buffett always looks at ROE to see whether a company has consistently performed well compared to other companies in the same industry.8 ROE is calculated as follows:
ROE = 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 analyze historical performance.
2. Company Debt
The debt-to-equity ratio (D/E) 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' equityas opposed to borrowed money.9 The D/E ratio is calculated as follows:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity
This ratio shows the proportion of equity and debt the company uses to finance its assets, and the higher the ratio, the more debt—rather than equity—is financing the company. A high debt level 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.
In 2012, Buffett announced he was diagnosed with prostate cancer.4 He has since successfully completed his treatment. Most recently, Buffett began collaborating with Jeff Bezos and Jamie Dimon to develop a new healthcare company focused on employee healthcare.5 The three have tapped Brigham & Women's doctor Atul Gawande to serve as chief executive officer (CEO).Warren Buffett: InvestoTrivia Part 3
About us - creator- Chandrahas Indalkar
Contact us - chandrahasindalkar8@gmail.com
Special thanks - Alison Czinkota(for the image)
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