Tuesday, 9 October 2012

The One-Dollar Premise of Warren Buffett

There is a quick test that can be used to judge not only the economic attractiveness of a business but how well management has accomplished its goal of creating shareholder value:  If Buffett has selected a company with favourable long-term economic prospects, run by able and shareholder-oriented managers, the proof will be reflected in the increased market value of the company.

  • In Buffett's quick test, the increase should, at the very least, match the amount of retained earnings, dollar for dollar.  
  • If the value goes up greater than the retained earnings, so much the better.  

All in all, Buffett explains, "Within this gigantic auction arena, it is our job to select a business with economic characteristics allowing each dollar of retained earnings to be translated eventually into at least a dollar of market value.  

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