Warren Buffett's name is familiar even to those far removed from the financial sector. The founder of a successful investment fund that generates substantial profits, he is known as the “Oracle of Omaha,” possessing an inexplicable intuition for identifying which stocks and companies are poised for growth. With a multi-billion dollar fortune to his name, Buffett’s financial success and extensive experience position him as one of the most respected authorities on investment.
Here are the principles that Buffett has adhered to throughout his life. While his strategy is notably conservative and faces criticism within the financial world, investors should take these guidelines into consideration.
To choose his next investment project, Warren Buffett analyzes:
1. The intrinsic value of a company. This complex concept and its associated evaluation tools are listed first not because they are easily calculable by everyone, but because it is Buffett's hallmark. According to the financial genius himself, this is the primary consideration he makes. The intrinsic value reflects the resources that an owner can extract from the company's operation over time. This metric is not found in financial statements and is more an art than a science. Unlike liquidation value, intrinsic value includes intangible assets (such as trademarks, intellectual property, etc.). By comparing a company’s intrinsic value to its market capitalization, the founder of Berkshire Hathaway delivers his verdict.
2. Evaluating other indicators is simpler because they can always be found in the classic reports of any public company. In second place in significance, Buffett highlights the return on equity (ROE). This figure reflects the relationship between a company’s net profit and its equity. Simply put, ROE reveals how quickly shareholders receive returns. The minimum period for which Buffett assesses return on equity is five years, but he often analyzes a ten-year time frame.
3. The debt-to-equity ratio (D/E) characterizes a company's debt burden. Few companies can do without borrowed capital at some points. However, a large share of borrowed funds in asset financing typically indicates that the company's performance is lacking. The higher the D/E ratio, the more financially stable the company is deemed to be.
4. The profit margin can be calculated by dividing net income by net sales. The time frame for evaluating this indicator is five years. It is a comprehensive metric— the longer and stronger the upward trend, the better the company's prospects and the higher the returns on invested capital.
5. The clarity of a company's field of activity for the investor is one of Buffalo’s leading criteria. Admittedly, this is one of the weaker aspects of his strategy. However, Warren openly admits that he does not understand modern technologies and does not invest in unfamiliar areas where he cannot assess risks. This does not mean that other investors should follow suit. If you have a good grasp of the industry of the company that interests you, understand what it develops and sells, you can adequately evaluate its prospects and, of course, consider investing.
6. A company's competitiveness directly influences its "personal" rating with Buffett. He tends to avoid acquiring assets from highly specialized companies or those producing goods that are indistinguishable from similar products on the market besides their packaging. From his perspective, the broader and more unique the range of products and services, the greater the company’s chances of staying afloat and generating profits for its shareholders.
Warren Buffett is undoubtedly a legend, yet he is an adherent of classic investment schemes, and one should not expect immediate opportunities to live off dividends. The primary factor leading to Buffett's success is time. Patience is essential, and results will come. However, if you prefer quick results and aggressive strategies, then this concept may not suit you. Always remember the considerably greater risks associated with losing everything in attempts to grow capital through speculation.
