Business Intelligence

Investment Strategies of the World’s Greatest Investor

by Robert G. Hagstrom Jr. (13000)

Warren Buffett is one of the most successful stock market investors of the past 30 years.

His entire approach is to focus on the value of the business and its market price. The Buffett approaches to investment are:

1. Never follow the day-to-day fluctuations of the stock market.
The market only exists to make it easier to buy and sell, not to set values. Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price.

2. Don’t try and analyze or worry about the general economy.
If you can’t predict what the stock market will do from day to day, how can you reliably predict the fate of the economy?

3. Buy a business, not its stock.
Treat a stock purchase as if you were buying the entire business, using the following tenets:

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?

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?

Market Tenets
1. What is the value of the business?
2. Can the business currently be purchased at a significant discount to its value?

4. Manage a portfolio of businesses
Intelligent investing means having the priorities of a business owner (focused on long-term value) rather than a stock trader (focused on short-term gains and losses).

The Warren Buffett Way

You might think that institutions, with their large staffs of highly-experienced investment professionals, would be a force for stability and reason in financial markets. They are not; stocks heavily owned and constantly managed by institutions have often been amongst the most inappropriately valued.

–Warren Buffett

[Buffett] has a way of motivating you. He trusts so much that you just want to perform.

–Bill Child, R.C. Wiley Home Furnishings

The numbers posted by Berkshire Hathaway have not come from some master plan we concocted in 1965. In a general way, we knew then what we hoped to accomplish but had no idea what specific opportunities might make it possible. Today, we remain similarly unstructured: Over time, we expect to improve our figures but have no road map to tell us how that will come about. We can expand the business into any areas we like — our scope is not circumscribed by history, structure or concept.

–Warren Buffett

We do have a few advantages, perhaps the greatest being that we don’t have a strategic plan. At Berkshire, we have no view of the future that dictates what business or industries we will enter. We prefer instead to focus on the economic characteristics of businesses that we wish to own and the personal characteristics of managers with whom we wish to associate — and then hope we get lucky in finding the two in combination.

–Warren Buffett