Investment Strategies of the World’s Greatest Investor Warren Buffet:
WARREN BUFFET was born on 30th august 1930 in Omaha, NEBRASKA. While in his senior year at the University of Nebraska, Buffet read Benjamin Graham’s book, The Intelligent Investor. This inspired Buffet that after finishing his degree he left to New York to study with Ben Graham at Columbia graduate business school.
There Buffet understood the importance of numbers in investing. He returned back and after the call from graham once again he went back and joined Graham-Newman Company in 1954. In 1956, Graham Newman disbanded. He returned back to Omaha.
With the base of knowledge acquired from Graham he started his investment company when he was twenty-five years old. His family and friends were supported him. In 1961 he bought dempster mill manufacturing company and in 1962 he began purchasing shares in Textile Company called Berkshire Hathaway, which was in miserable condition by that time. Buffet really struggled to turn it into profits. By late 1970s shareholders of Berkshire Hathaway began losing trust. However he didn’t lose heart because he believed
* The textile mills were the largest employer in their area.
* The work force was senior people with skills that cannot be transferred.
* High interest from management
* Reasonable union
With all these reasons he believed that profit can be earned from textile business. As Hathaway entered in 1980s Buffet understood the ground realities.
* Textiles Are Commodities and Commodities Can Least Differentiate Themselves from Their Competitors.
* In Order to Stay Competitive Textiles Have to Invest in Capital Improvements.
* Cheap Labor from Foreign Competition was Disturbing Profits.
Then based on these facts Buffet closed his books of textile group, thus ending the business. However in between 1962 and 1980 Buffet has purchased a lot of companies under Berkshire Hathaway, Insurance, Blue Chip Stamps, See’s Candy Shops, Buffalo News, Furniture Etc.
Even after closing of textile business he acquired many companies. Based on all his experiences compiled Robert. G.Hagstorm in his book gives four tenets that Warren Buffet adapted as his investment strategy.
1. Business Tenets
a) Is business simple and understandable?
b) Does the business have a consistent operating history?
c) Does the business have favorable long -term prospects?
2. Management tenets
a) Is management rational?
b) Is management candid with the shareholders?
c) Does the management resist the institutional imperative?
3. Financial tenets
a) Focus on return on equity, not earnings per share.
b) Calculate” owner earnings” to get a true refection of value
c) Look for companies with high profit margins
d) For every dollar retained, make sure the company has created at least one dollar of market value.
4. Market tenets
a) What is the value of business?
b) Can the business be purchased at a significant discount to its value?
In the upcoming articles I will be explaining each tenet in detail.
