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Warren
Buffett's philosophy can be summarized into key principles:
If
you had invested $100 in Berkshire Hathaway when he took over in 1965, you
would have about $220,000 today. He
views investing as buying a piece of a business, rather than “renting”
shares of a company for the short term.
Buffett
looks at business fundamentals and prefers a business that is:
1.
simple and understandable.
His
purchases are not determined by gloomy economic forecasts, or pessimistic
stock market forecasts. He tends to put fairly large sums of money into
things that he knows and management that he trusts. He
doesn't invest in companies outside his 'circle of competence'. If you
understand the industry, you should not stay out just because he does.
For example, Buffett until recently, has shied away from the
technology sector.
2.
consistent operating history.
Buffett
looks at the following indicators, which include return on equity, changes
in operating margins, debt levels, and capital expenditure needs, and cash
flow. Buffett
watches Wall Street only to the extent necessary to take advantage of
shortcomings of the market.
3.
favorable long-term prospects.
A
good business does not always mean it’s a good purchase, although it is
a good place to look for one. The best businesses to own are ones that can over
time employ large amounts of capital at very high rates of return.
Buffett
buys using a buy-and-hold strategy that has financial advantages over
other strategies that emphasize short-term trading.
This is
because
when short-term trading is used, you end up paying tax on
the proceeds before they are reinvested. This results in an erosion
of capital over time.
Buffett's
companies generally have a strategic advantage over other companies in its
industry.
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