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Warren Buffett's
Investment Principles
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:
Sticking to what you
know
Share
buybacks
Good use of retained earnings
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
3. The company should have consistently high returns.
Warren Buffett would look at both:
Returns on equity
Returns on capital
4. The company should have a prudent approach to debt.
5. The businesses of the company should be simple and
the investor should have an understanding of the
company.
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
7. Investors need to take a long term approach.
By buffettsecrets.com
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