Thursday, 15 August 2013
Warren Buffett's Investment Checklist
How would your firm look to the premier investor? What does great investment potential look like to Mr. Buffett?(ed.)
A checklist for the stock selector; the Warren Buffett criteria:
Buffett sees the economic world as being divided into franchises and commodity businesses. He defines a franchise as a company providing a product or service that is (1) needed or desired, (2) has no close substitute, and (3) is not regulated. Look for the franchise business.
Is the management rational with its capital?
A company that provides average or below-average investment returns but generates cash in excess of its needs has three options: (1) It can ignore the problem and continue to reinvest at below average rates, (2) it can buy growth, or (3) it can return the money to shareholders. It is here that management will behave rationally or irrationally. In Buffett's mind, the only reasonable and responsible course is to return that money to shareholders by raising the dividend, or buying back shares.
Reference to Robert Hagstrom's book The Warren Buffett Way, John Wiley & Sons Inc., New York, 1994.