|
Warren Buffett, the ‘Sage of Omaha',
is generally considered to be the world’s most successful investor.
His investment vehicle, Berkshire Hathaway, is legendary.
Below is a summary of Warren Buffett's investment phylosophy:
What is value investing?
Devotees of Benjamin Graham’s Value
Investment theory, including Warren Buffet, argue that the essence of
value investing is to buy stocks at a lower price than their
intrinsic value. The intrinsic value is the discounted value of all
future distributions. "If a business does well, the stock
eventually follows."
Why does Warren Buffett believe in
Value Investing?
Benjamin Graham was Buffett's mentor,
and the source of Buffett's success. For more information on Benjamin
Graham click here.
In his article The
Superinvestors of Graham-and-Doddsville (Dodd was co-author of
Benjamin Graham’s famous book, “Security
Analysis”), Buffett refuted the academic
Efficient-Market hypothesis,
saying that beating the S&P 500
was "pure chance", and highlighting the huge number of
successful students of the Graham and Dodd Value Investing school of
thought.
Value Investing according to Buffett
Warren Buffett has
taken the Value Investing concept even further as his thinking has
evolved to where for the last 25 years or so his focus has been on
"finding an outstanding company at a sensible price" rather
than generic companies at a bargain price. "If you don't
know jewelry, know the jeweler."
In his November, 1999 Fortune article,
he warned of investors' unrealistic expectations:
“Let me summarize what I've been
saying about the stock market: I think it's very hard to come up
with a persuasive case that equities will over the next 17 years
perform anything like they've performed in the past 17. If I had to
pick the most probable return, from appreciation and dividends
combined, that investors in aggregate - repeat, aggregate - would
earn in a world of constant interest rates, 2% inflation, and those
ever hurtful frictional costs, it would be 6%.”
Buffett’s guide to Value Investing
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:
-
The company should be soundly
managed. Tests of good management include:
-
The company has demonstrated
earning capacity with a likelihood that this will continue. Tests
of earning capacity include:
-
Company growth
-
Dealing with inflation
-
Capital expenditure
-
Look through earnings
-
Brand names
-
The company should have
consistently high returns. Warren Buffett would look at both:
-
Returns on equity
-
Returns on capital
-
The company should have a prudent
approach to debt.
-
The businesses of the company
should be simple and the investor should have an understanding of
the company.
-
Assuming that all these thresholds
are satisfied, the investment should only be made at a reasonable
price, with a margin of safety. This is always a matter for
independent judgment by the investor but it is relevant to consider:
-
Investors need to take a long term
approach.
Other interesting Value Investing articles can be found by clicking here
Have you signed up for my free weekly newsletter "Investing that makes sense" yet?
Sign up now and receive
articles like this in your inbox weekly.
And if you sign up now you will also receive a
10 page free bonus report - Enhanced Checklist for Value Investors - with over
30 proven checklist items to improve your investment returns.
I respect your privacy - Privacy
Policy
Sources and Further Reading
Buffettsecrets
Buffettsystem
Berkshire Hathaway
P.S. A media company in the wrong country at the wrong time...
This month the company I found for subscribers is located in France.
In terms of the size of companies I look at its quite large with a market value of €1,72 billion.
The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.
In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.
Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.
When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.
I am sure you will agree this is undervalued.
To immediately get your hands on this value investment idea (for as little as €39) click here.
|
