Warren Buffett is known as a businessman and philanthropist, but he’s probably best known for being one of the world’s most successful investors. So just what are the secrets to his success? Read on to learn more about Buffett’s strategy and how he’s managed to amass such a fortune from his investments.
History
Warren Buffett was born in Omaha, Nebraska in 1930
- He developed an interest in the business world and investing at an early age
- Buffett started his education at the Wharton School at the University of Pennsylvania before moving back to Nebraska, where he received an undergraduate degree in business administration
- Later went to Columbia Business School where he earned a graduate degree in economics
- Started as an investment salesperson in the early 1950s, then formed Buffett Associates
- In 1965, he was in control of Berkshire Hathaway, and in 2006 he announced his plans to donate his entire fortune to charity
Company Debt
Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders’ equity as opposed to borrowed money.
- Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity
- This ratio shows the proportion of equity and debt the company uses to finance its assets, and the higher the ratio, the more debt-rather than equity-is financed.
Is the Company Public?
Only consider companies that have been around for at least 10 years
- Past performance does not guarantee future performance
- The SEC requires companies to file regular financial statements
- These documents can help you analyze important company data-including current and past performance-so you can make important investment decisions
How Did Warren Buffett Become Rich?
Buffett became rich steadily over a long period of time primarily through investing
Buffett’s Methodology
Warren Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock’s level of excellence and its price
Is Warren Buffett Self-Made?
Warren Buffett is self-made
- He did come from a fairly privileged background, however
- His father owned a stock brokerage firm, and his mother was a U.S. Congressman
- This allowed Buffett to attend prestigious schools, and he did start his own company and make his own investments that eventually led to his enormous wealth
Company Performance
Return on equity (ROE) is often referred to as the stockholder’s return on investment
Profit Margins
This is calculated by dividing net income by net sales.
- High-profit margin indicates the company is executing its business well, but increasing margins mean management has been extremely efficient and successful at controlling expenses.
- For a good indication of historical profit margins, investors should look back at least five years.
Bottom Line
Buffett’s investing style is like the shopping style of a bargain hunter
Buffett’s Philosophy
Value investors look for securities with prices that are unjustifiably low based on their intrinsic worth
- They believe that the market will eventually start to favor those quality stocks that were, for a time, undervalued
- Buffett, however, isn’t concerned with the supply and demand intricacies of the stock market
- When Buffett invests in a company, he doesn’t care about whether or not the market recognizes its worth, he is concerned with how well that company can make money
Commodity Reliance
Buffett shies away from companies whose products are indistinguishable from those of their competitors, especially those that rely solely on a commodity such as oil and gas.
- If a company does not offer anything different from another firm in the same industry, Buffett does not see much differentiation.
Is It Cheap?
To check this, an investor must determine a company’s intrinsic value by analyzing a number of business fundamentals including earnings, revenues, and assets.
- Once Buffett determines the intrinsic value of a company, he compares it to its current market capitalization-the current total worth or price.
