Warren Buffett does not readily disclose the investments he makes on
behalf of himself or Berkshire Hathaway. He does, every year, report on
the substantial holdings of his company in other corporations. These
provide only tiny clues however to why, when and where he invests.
He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this.
Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business – the Benjamin Graham approach:
1. The company should be soundly managed. Tests of good management include:
2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
5. The businesses of the company should be simple and the investor should have an understanding of the company.
See case studies
6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this.
Stock investments should be looked at in the same way as buying a business. The stock investor is really buying a tiny share or partnership and should apply the same principles that they would in buying a business – the Benjamin Graham approach:
1. The company should be soundly managed. Tests of good management include:
2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:
- Company growth
- Dealing with inflation
- Capital expenditure
- Look through earnings
- Brand names
- Returns on capital
5. The businesses of the company should be simple and the investor should have an understanding of the company.
See case studies
6. Assuming that all these thresholds are satisfied, the investment should only be made at a reasonable price, with a margin of safety. This is always a matter for independent judgment by the investor but it is relevant to consider:
- Price/earnings ratios
- Earnings and Dividend yields
- Book value
- Comparative rates of return
