Warren Buffett How He Does It
Example of questions Buffett asks himself:
- 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.
- Has the company avoided excess debt?
- What is the debt to equity ratio? (Total Liabilities / Shareholders’ Equity)
- 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
- How old is the company?
- How long has the company been public?
- Does Buffett fully understand the business?
- 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.