Buffettology: Warren Buffett Quotes & Value Investment Strategy for Stock Picks
Secrets to Investing Success
Warren Buffett Quotes on Investing
- “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.”
- “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
- “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- “Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid.”
- “If a business does well, the stock eventually follows.”
- “Price is what you pay. Value is what you get.”
- “Time is the friend of the wonderful company, the enemy of the mediocre.”
Buffettology and Stock Selection
Best Stock Industries
Buffett’s choice businesses include those that make products which are consumed or quickly wear out such as:
- Razor blades
Another major category of companies that Warren likes is communications. Advertising agencies are a major part of this group as they expand into new platforms like cell phones and tablet computers, in addition to the old standbys of TV, radio, and newspapers.
The last category is for repetitive and boring services. A few examples of these highly profitable companies doing the same job over and over might be:
- Lawn care companies
- Janitorial services
- Basic tax filing services
What Characteristics in a Company to Look For
Warren Buffett analyzes considerable historical financial data on a stock. In general, this would exclude new companies where only a few years of financial data exist. He picks stocks based on their intrinsic value and the ability of the company to continually increase that value, often wanting a minimum of 15% annually over many years. This kind of regular increase can be considered a High Annual Rate of Return.
Warren looks for these financial traits in companies:
- Increasing Earnings. It is especially important that a large amount of this money is being retained and used for further growth. Sitting on a big pile of cash, or giving earnings back as dividends, is not viewed as desirable since extra tax may need to be paid on dividends, and the burden of re-investing is placed on the shareholder.
- Reasonable Financing. The financing for the company should be reasonable, without a high debt-load.
- Simple Business Model. The company model should be simple with few moving parts, and not a lot of money needed to maintain the business model. It should be a lean, mean, and profitable operation.
Valuing a Company Buffett-style
1. Earnings Yield
- Aeropostale Inc. (NYSE: ARO) has a share price of around $25 and an annual earnings of $2.59. If you divide $2.59 by $25 you get the earnings yield of 10.36%.
- Hansen Natural Corporation (NASDAQ:HANS) has a share price of $56 and an annual earnings per share of $2.39 and only 4.2% of the share price is annual earnings.
- McDonald’s is trading at a $75 with annual earnings of $4.62 per share, which gives us an earnings yield 6.2%.
2. Future Price Based on Past Growth
- Year 0, EPS: 4.62
- Year 1, EPS: 5.43
- Year 2, EPS: 6.39
- Year 3, EPS: 7.51
- Year 4, EPS: 8.84
- Year 5, EPS: 10.39
- Year 6, EPS: 12.22
- Year 7, EPS: 14.37
- Year 8, EPS: 16.90
- Year 9, EPS: 19.88
- Year 10, EPS: 23.37
- Class A Shares with a current sticker price of $127,630 each.
- Class B Shares which currently sell for $85.04 each.