Investors have long appreciated the ability of Warren Buffett to choose which company to invest. Lauded for consistently following the principles of value investing, Buffett has accumulated a fortune over decades, over $ 80 billion, according to Forbes. He resisted the temptation associated with investing in the “next big thing”, and have also used their enormous wealth to promote the charity.
Understanding Warren buffet starts with analyzing the investment philosophy of the company, he is most closely connected with Berkshire Hathaway. Berkshire has a long and public strategy when it comes to the purchase of shares: the company should have consistent earning, good return on equity, capable management, and reasonable price.
Buffett belongs to the investment of school value popularized by Benjamin Graham. Investing looks at the intrinsic value of stocks, instead of focusing on technical indicators such as moving averages, volume or momentum indicators. The definition of intrinsic value is an exercise in understanding a company’s finances, especially official documents such as income.
There are a few things to note about the investment strategy of Buffett. To guide him in his decisions, Buffett uses a number of key factors for assessing the attractiveness of investments.
The company spent?
Companies that have a positive and acceptable return on equity (roe) for many years are more desirable than companies that have only a short period of solid returns. The greater the number of years of good calf, the better.
How much debt the company has?
Having a large ratio of debt to equity should raise a red flag, because more of the profit of the company intend to go to service the debt, especially if the growth is only from adding new debt.
Buffett looks for companies that have good profits, especially if the net profit is increasing. As in the case of caviar, it considers the profit over several years discount short-term trends.
How unique are the products sold by the company?
Buffett believes the companies that produce products that can be easily replaced to be more risky than companies that provide more unique offers. For example, the product oil company – oil is not all that unique, because the clients can buy oil from any other competitors. However, if the company has access to a more desirable grade of oil that can be easily updated – something that can be an investment worth a look.
How much of a discount the stock is trading?
This is the essence of value investing: finding companies that have good fundamentals, but below where they should be. The more discount, the more room for profitability.
For its value-oriented, Buffett is also known as buy and hold investors. He is not interested in selling shares in the short term to realize capital gains; rather, he chooses stocks that he thinks offer good prospects for long-term growth. This leads him to move the focus away from what others are doing. Instead, it looks at whether the company is in solid position to earn money, to move forward and if its stock affordable.