Warren Buffett Stock Basics

Warren Buffett Stock Basics
Warren Buffett only has 4 rules
1. A stock must be stable and understandable
2. A stock must have long term prospects
3. A stock must be managed by vigilant leaders.
4. A stock must be undervalued.

ALL 4 rules must be met before buying the company.


A quick valuation tool by Graham.
@ 13.00

Look for
P/E < 15 and P/BV < 1.5
or

P/E * P/BV < 22.5

Then this is a company you need to look at.


https://www.youtube.com/watch?v=_uQjGz6jp2E&list=PL8u0bnZsL5kmAFryBYc9YzLNIENnvLAJF

Buffett's confession

Buffett's advice and investment principles have proven, time and again, to be a safe  for millions of investors.

Occasionally misaligned investors will yell out, "But it's different this time!" and occasionally they will be right.

Change is constant, but these investment principles have endured.

"That is why they are called principles,"  Buffett once quipped.

From the 1996 annual report of Berrkshire Hathaway:  
"Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.  Over time, you will find only a few companies that meet those standards - so when you see one that qualifies, you should buy a meaningful amount of stock."  

You cannot find a better touchstone than that.

Buffett's confessed that "what I do is not beyond anybody else's competence."   

Yet, it is extraordinary how resistant some people are to learning anything, even when it is in their self-interest to learn!.



Additional notes:

Buffett invariably follows the same strategy.

He looks for companies:
1.  he understands.
2.  with favourable long-term prospects,
3.  that are operated by honest and competent people, and,
4.  that are, importantly, available at attractive prices.

Making Money the Warren Buffett Way (Educational Videos)

https://www.udemy.com/value-investing-code/



by MILLIONAIRE INVESTOR
Always wanted to learn how to invest like the world's greatest investor - Warren Buffett?

Then let this simple investment course teach you the fundamentals of Value Investing - the investing philosophy that has made Warren Buffet the richest investor in the world. In this stock market for beginners course, you'll learn how the stock market works, the basics of personal financial management, the concept of value investing, and how to analyze and pick the best companies to invest in.

For the aspiring or beginner investor, this 30-video investment course is right up your alley in helping you achieve financial freedom and passive income through the power of value investing!

*Please note that we are not affiliated with Warren Buffett or Berkshire Hathaway in any way. We just think Warren Buffett is one really cool dude who just happens to be the greatest investor of all time.

Warren Buffett and his Principles

Warren Buffett's Investment Checklist

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:

Is the business simple and understandable?

"An investor needs to do very few things right as long as he or she avoids big mistakes." Above-average returns are often produced by doing ordinary things exceptionally well.

Does the business have a consistent operating history?

Buffett's experience has been that the best returns are achieved by companies that have been producing the same product or service for several years.

Does the business have favourable long-term prospects?

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.

Is management candid with the shareholders?

Buffett says, "What needs to be reported is data - whether GAAP, non-GAAP, or extra-GAAP - that helps the financially literate readers answer three key questions: (1) Approximately how much is this company worth? (2) What is the likelihood that it can meet its future obligations? and (3) How good a job are its managers doing, given the hand they have been dealt?" "The CEO who misleads others in public may eventually mislead himself in private."

Does management resist the institutional imperative?

According to Buffett, the institutional imperative exists when "(1) an institution resists any change in its current direction; (2) just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds; (3) any business craving of the leader, however foolish, will quickly be supported by detailed rate-of-return and strategic studies prepared by his troops; and (4) the behaviour of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated."

Is the focus on Return On Equity?

"The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the consistent gains in earnings per share."

What is the rate of "owner earnings"?

Buffett prefers to modify the cash flow ratio to what he calls "owner earnings" - a company's net income plus depreciation, depletion and amortization, less the amount of capital expenditures and any additional working capital that might be needed. Owner earnings are not precise and calculating future capital expenditures requires rough estimates.

Is there a high profit margin?

In Buffett's experience, managers of high-cost operations continually add to overhead, whereas managers of low-cost operations are always finding ways to cut expenses. Berkshire Hathaway is a low-cost operation with after-tax overhead corporate expense of less than 1 percent of operating earnings, compared to other companies with similar earnings but 10 percent corporate expenses.

Has the company created at least one dollar of market value, for every dollar retained?

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

What is the value of the business?

Price is established by the stock market. Buffett tells us the value of a business is determined by the net cash flows expected to occur over the life of the business, discounted at an appropriate interest rate, and he uses the rate of the long-term U.S. government bond.

Can it be purchased at a significant discount to its value?

Having put a value on the business, Buffett then builds in a margin of safety and buys at prices far below their indicated value.

Reference to Robert Hagstrom's book The Warren Buffett Way, John Wiley & Sons Inc., New York, 1994. 

http://www.refresher.com/!buffett2.html

How does Buffett make his picks? His 5 investment criteria.

How does Buffett make his picks? 

In short, he uses the following five investment criteria.

● Free cash flow of at least $250 million.

● Net profit margin of 15% or more.

● Return on equity of at least 15% for each of the past three years and the most recent quarter.

● One dollar’s worth of shareholder equity created for every dollar of retained earnings over the past five years.

● Market capitalization of at least $500 million.


One more criterion is added to eliminate overvalued stocks: comparing our five-year discounted cash flow estimate with the current price.

Ref:  http://www.thestockadvisors.com/Main-Section/SP-buys-that-pass-the-Buffett-test.html

"Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because of management retained earnings, not because it did well with the capital in its hands. " ~ Warren Buffet

Warren Buffet once stated - "Unrestricted earnings should be retained only where there is a reasonable prospect - backed preferably by historical evidence or, when appropriate by a thoughtful analysis of the future - that for every dollar retained by the corporation, at least one dollar of market value will be created for owners. This will happen only if the capital retained produces incremental earnings equal to, or above, those generally available to investors." Hence for a booming business, the primary goal is to create 1$ in market for every 1$ of the retained earnings.

Read more at Buzzle: http://www.buzzle.com/articles/retained-earnings-calculation.html

Invest like Buffett - The Limited 20 Holes Punch Card of His Investing (The Buffett Way)

When opportunity comes within your strike zone/buying zone ONLY then invest(Science Of hitting-Ted Williams)

Historical PE ratio & S&P 500

Warren Buffett - 4 Steps to Picking a Stock

1. You have to deal in things that you are capable of understanding.

2. Then once you're over that filter, you need to have a business with some intrinsic characteristics that give it a durable competitive advantage.

3. Then you should vastly prefer management in place with a lot of integrity and talent.

4. Finally, no matter how wonderful it is, it's not worth an infinite price, so you have to have a price that makes sense and gives a margin of safety considering the natural vicissitudes of life.

It's a very simple set of ideas. The reason that these ideas have not spread faster is they're too simple.

WARREN BUFFETT THE BILLIONAIRE NEXT DOOR GOES GLOBAL

Bill Gates talking about Warren Buffett

The Truth About Warren Buffett

Warren Buffett - How to Identify a Good Investment

Warren Buffett and value investing

The fact that Graham suggested different strategies for what he called defensive investors and enterprising (and more enterprising) investors does not mean that value investments and growth investments are mutually exclusive. Warren Buffett has shown that you can value invest in shares that grow over time. He has always acknowledged that his investment style is based on Benjamin Graham’s principles and he cannot understand why all investors don’t do the same thing. In March 2012, Buffett told a group of MBA  students that:

The principles of value investing have not changed from the teachings of Ben Graham until now.

Buffett identified for the MBA students the two factors that mark the value investor: a long term perspective and the patience to not seek to get rich overnight: value investors are not concerned with getting rich tomorrow but over a ten year period instead.

There is nothing wrong with getting rich slowly.

But Buffett has added his own riders to Graham’s tenets and to some extent introduced a subjective element to the objectivity of Graham, particularly in his preference for businesses with a competitive advantage.

He gave the MBA students his (and our) favorite example  - Coca Cola. He explained that people will go on drinking Coke because they like it; possible loss of markets in the Western world because of health concerns or competition is more than made up by new customers in other countries; the company has been doing the same thing for many years; it sticks to its core business; and if it decides to add a cent or two to the sale price of a Coke to adjust for inflation or to cover any loss of margins, nobody is going to stop drinking it.

At various times, Buffett has decided that Coke has fallen below its intrinsic value and stepped in and bought shares – that is value investing.

Buffett sums up value investing

When Buffett was asked to explain his investment strategy, the words that he used essentially reflect the essence of value investing: look at a stock, assess its value, work out a price that you can pay for it with a minimum of risk, wait patiently for that price and then buy in when you can. Buffett said:

Invest in equities slowly over time … And look to buy companies that will go on forever like Coca Cola … but the key is to buy equities slowly over time and don’t try to time the market. For the more serious investor, buy equities strategically, opportunistically.

10 Points on Warren Buffett's Investing

1. Warren only invests in stuff that he understands.
2. He doesn’t trade, he invests!
3. His main decision making source are Annual Reports
4. He only buys at a “good price”.
5. He only buys things with the intention to hold them forever (no rule without exception).
6. He holds 8% of Coca-Cola and is absolutely certain that the value of Coca-Cola will increase substantially over the next 20 years, i.e. there is no reason to sell.
7. He only invests in simple business models (beverages, sweets, chewing gums, insurance).  If he doesn’t understand the industry, he doesn’t invest.  E.g. he doesn’t invest into technology/internet companies.
8. He can make a purchase decision in 5 – 10 minutes.  He doesn’t overanalyze companies.  He doesn’t negotiate very much.  When the price that is offered to him is okay, he buys immediately.  When he offers a price, it’s often non-negotiable and he expects very fast decisions.
9. He recommends not to listen to stock recommendation.  If you do that, you’re playing and not investing.
10. He still lives in the same house he bought as a 25 year old. 

Conclusion:

I will definitely read and listen to more stuff of and about Warren!  There are some very important lessons to learn!

Warren Buffett MBA-Talk

http://www.docstoc.com/docs/1024971/Warren-Buffett-MBA-Talk

Warren Buffett Intrinsic Value Calculation

How do we determine the intrinsic value of a company?

"Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life." - Warren Buffett

"As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised. Two people looking at the same set of facts, will almost inevitably come up with at least slightly different intrinsic value figures." - Warren Buffett

Warren Buffett Stock Basics

How to Invest like Warren Buffett

1. High ROCE + Low Debt
2. Predictable Earnings
3. Profits generate a lot of Cash Flows
4. Uncomplicated Business (you can understand)
5. Strong Brand + Pricing Power
6. Managers are also Owners of Business

Buffett believes it is foolish to use short-term prices to judge a company's success. What happens to the stock price in the short run is inconsequential.

If adapting Buffett's investment strategy required only a change in perspective, then probably more investors would become proponents.  Unfortunately, applying Buffett's approach requires changing not only perspective but also changing how performance is evaluated and communicated.

The traditional yardstick for measuring performance is price change:  the difference between the purchase price of the stock and the market price of the stock.  In the long run, the price of a stock should approximate the change in value of the business.  However, in the short run, prices can gyrate widely above and below a company's value, dependent on factors other than the progress of the business.  The problem remains that most investors use short-term changes to gauge the success or failure of their investment approach.  However, these short-term price changes often have little to do with the changing economic value of the business and much to do with anticipating the behaviour of other investors.

Buffett believes it is foolish to use short-term prices to judge a company's success.  Instead, he lets his companies report their value to him, by their economic progress.  Once a year, he checks several variables:

• Return on beginning shareholder's equity
• Change in operating margins, debt levels, and capital expenditure needs.
• The company's cash generating ability.

If these economic measurements are improving, he knows the share price, over the long term, should reflect this.  What happens to the stock price in the short run is inconsequential.

The difficulty of using economic measurements as yardsticks for success is that communicating performance in this manner is not customary.  Clients and investment professionals alike are programmed to follow prices.  The stock market reports price change daily.  The client's account statement reflects price change monthly and the investment professional, using price change, is measured quarterly. 

The answer to this dilemma may lie in employing Buffett's concept of "look-through" earnings.  If investor use look-through earnings to evaluate their portfolio's performance, perhaps the irrational behaviour of solely chasing price might be tempered.

The more appropriate question is not how did Buffett do it but why did not other investors apply his approach?

How did Buffett do it?

Given the documented success of Buffett's performance coupled with the simplicity of his methodology, the more appropriate question is not how did he do it but why did not other investors apply his approach?  The answer may lie in how individuals perceive investing.

When Buffett invests, he sees a business.  Most investors see only a stock price.  They spend far too much time and effort watching, predicting, and anticipating price changes and far too little time understanding the business they partly own.  Elementary as this may be, it is the root that distinguishes Buffett.

His hands-on experience owning and managing a wide a variety of businesses while simultaneously investing in common stocks separates Buffett from all other professional investors.

Owning and operating businesses has given Buffett a distinct advantage.  He has experienced both success and failure in his business ventures and has applied to the stock market the lessons he learned. The professional investor has not been given the same beneficial education.

While other professional investors were busy studying capital asset pricing models, beta, and modern portfolio theory, Buffett studied income statements, capital reinvestment requirements, and the cash-generating capabilities of his companies.

"Can you really explain to a fish what it's like to walk on land?"  Buffett asks.  "One day on land is worth a thousand years of talking about it and one day running a business has exactly the same kind of value."

According to Buffett, the investor and the businessperson should look at the company in the same way because they both want essentially the same thing.  If you ask a businessperson what he thinks about when purchasing a company, the answer most often given is:  "How much cash can be generated from the business?"