Warren Buffett Strategy
Highlights from Warren Buffett and the Interpretation of Financial Statements
We are continuing our research into how Warren Buffett makes investment decisions. What are the critical things that he focuses on? We are reading Warren Buffett and the Interpretation of Financial Statements which is very useful. The book was written by Mary Buffet (Warren’s daughter-in-law) and David Clark (managing part of private investment group).
Warren looks at company shares as long-term investments or “equity bonds” (earnings per share). He carefully does his homework and invests with the perspective of “the longer you hold on to the shares, the better you will do.”
Below are some of the characteristics that Warren focuses on when looking to invest in a company:
Competitive Advantage
- Durable competitive advantage
- Unique products or services (e.g., Coca-Cola, Hershey)
- Powerful brands. Conveys “a piece of the consumer’s mind.”
- Lowest price sellers
- Monopoly-like economics
Financials
- Net incomes consistently at ≥ 20% of revenue (are generally the industry leaders)
- Consistently achieves gross profit margins of ≥ 40% (indicates firm has durable competitive advantage)
- Little external debt and low interest expenses
- Predictable cash flows
- Stable “selling, general and administrative” (SGA) expenses at ≤ 30% of gross profit
- Low R&D costs. Higher R&D costs suggests firm could be in higher risk competitive environment
- Low depreciation expenses
- Return on revenue (net income / revenue) of ≥ 20%. Ongoing higher ROR suggests firm has durable competitive advantage
- Strong cash and liquid investments. Suggests firm can endure during hard times.
- Net amount of accounts receivable / sales revenue
- Current ratio (current assets / current liabilities)
- Retained earnings (% net earnings not paid out as dividends, but retained to be reinvested in its core business or to pay debt
- Pays dividends
Click image to link to book on Amazon