Though Warren Buffett popularized the idea of the moat, he credits partner Charlie Munger for bringing him around to the idea that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
A quality strategy is a bet that the market doesn't appreciate wonderful companies enough, particularly their earnings potential many years out.
As Charlie Munger said, "If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result."
(Of course, it's not easy to identify in advance firms that can sustain such high rates of return for so long.)
http://news.morningstar.com/articlenet/article.aspx?id=643125&SR=Yahoo
Showing posts with label wonderful company. Show all posts
Showing posts with label wonderful company. Show all posts
Thursday, 17 April 2014
Friday, 21 December 2012
Warren Buffett on how to obtain superior profits from stocks.
An investor cannot obtain superior profits from stocks by simply committing to a specific investment category or style. He can earn them only by carefully evaluating facts and continuously exercising discipline.
Common stocks are the most fun. When conditions are right that is, when companies with good economics and good management sell well below intrinsic business value - stocks sometimes provide grand-slam home runs.
- We often find no equities that come close to meeting our tests.
- We do not predict markets, we think of the business.
- We have no idea - and never have had - whether the market is going to go up, down, or sideways in the near- or intermediate term future.
Friday, 15 June 2012
What should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?
"It is better to buy a wonderful company at fair price than a fair company at wonderful price."
In general, if you can buy a quality stock today for a historically fair price or fair P/E, you should probably do so, provided the reward and risk are attractive.
However, what should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?
A low price or low P/E is probably your biggest concern, because it suggests that people who are buying the stock today might know something negative about the company that you don't know.
Think about it. Why would investors pay less for the stock than it has typically sold for?
If the price or P/E is too low - move on to another company and forget about looking at the risk and reward. You may miss a few good stocks, but you won't have to lose any sleep worrying about being wrong.
If the price or P/E ratio is too high, this tells you two things.
(E.g. _____________)
Just know that, if you buy a stock whose price or P/E is too far above the fair price or fair P/E, when it later comes back down - which it usually will - the decrease in P/E can reduce your gain considerably. Your chances of having a superior portfolio are far better if you select stocks for which you don't have to make any allowances.
As you gain more experience, you'll find that you can make some intelligent exceptions in cases of high or low price or P/E, but for now, the advice for those who are just starting out, don't.
In general, if you can buy a quality stock today for a historically fair price or fair P/E, you should probably do so, provided the reward and risk are attractive.
However, what should you do if you find that the price or P/E is significantly above or below the historically fair price or fair P/E mark?
A low price or low P/E is probably your biggest concern, because it suggests that people who are buying the stock today might know something negative about the company that you don't know.
Think about it. Why would investors pay less for the stock than it has typically sold for?
- Is there something in the news that you haven't heard about?
- Has an analyst - or have a number of analysts - announced a reduced expectation of future earnings based upon something they know that you don't know?
- Have you missed something in your quality analysis - or (shame on you!) recklessly jumped over that barbed-wire fence, failing to evaluate quality deliberately enough before moving on to look at the value considerations?
If the price or P/E is too low - move on to another company and forget about looking at the risk and reward. You may miss a few good stocks, but you won't have to lose any sleep worrying about being wrong.
If the price or P/E ratio is too high, this tells you two things.
- The first is that other investors appear to agree with you about the quality issues, because they are paying a healthy price for the stock.
- The second is that it may be too healthy a price.
- You may want to put off buying it until the price becomes more reasonable.
- Or, it may be worth the premium if the risk and reward are satisfactory.
(E.g. _____________)
Just know that, if you buy a stock whose price or P/E is too far above the fair price or fair P/E, when it later comes back down - which it usually will - the decrease in P/E can reduce your gain considerably. Your chances of having a superior portfolio are far better if you select stocks for which you don't have to make any allowances.
As you gain more experience, you'll find that you can make some intelligent exceptions in cases of high or low price or P/E, but for now, the advice for those who are just starting out, don't.
Friday, 4 May 2012
Quality: There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices.
Investment is most intelligent when it is most businesslike.
Ben Graham - "The Intelligent Investor"
“There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favourable prices exist, full advantage should be taken of the situation.”
Philip A. Fisher, ‘Developing an Investment Philosophy’, 1980
The moral of this is that only an excellent business bought at an excellent price makes an excellent investment. One without the other just won’t do.
Investors start from the premise that there is no philosophical distinction between part ownership (i.e. buying shares in a company) and outright ownership (i.e. buying the business in its entirety). All we are looking for is pieces of businesses to buy at the right price.
Warren Buffett put it thus:
“Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.”¹
Criteria for Stock Selection
It follows that there are several important criteria that companies selected for investment consideration must exhibit in abundance. Among these are that:
http://www.sanford-deland.com/pages/quality+of+businessBen Graham - "The Intelligent Investor"
“There are a relatively small number of truly outstanding companies. Their shares frequently can’t be bought at attractive prices. Therefore, when favourable prices exist, full advantage should be taken of the situation.”
Philip A. Fisher, ‘Developing an Investment Philosophy’, 1980
The moral of this is that only an excellent business bought at an excellent price makes an excellent investment. One without the other just won’t do.
Investors start from the premise that there is no philosophical distinction between part ownership (i.e. buying shares in a company) and outright ownership (i.e. buying the business in its entirety). All we are looking for is pieces of businesses to buy at the right price.
Warren Buffett put it thus:
“Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.”¹
Criteria for Stock Selection
It follows that there are several important criteria that companies selected for investment consideration must exhibit in abundance. Among these are that:
- Their business model is easily comprehensible;
- They produce transparent financial statements;
- They demonstrate consistent operational performance with earnings being relatively predicable;
- They generate high returns on capital employed;
- They convert a high proportion of accounting earnings into free cash;
- Their balance sheet is strong without unduly high financial leverage;
- Their management is focused on delivering shareholder value and is candid with the owners of the business;
- Their growth strategy is more likely to rely on organic initiatives than frenetic acquisition activity.
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause their share prices to be misappraised. Again as Buffett puts it, “Price is what you pay, value is what you get”.² Having identified a universe of truly outstanding companies, we must wait until their shares can be bought at a price on the stockmarket that is substantially less than their true economic worth.
References:
¹ Warren E. Buffett, Forbes, 6 August 1990
² Warren E. Buffett, Letter to Partners (Buffett Partnership), July 1966
Tuesday, 3 April 2012
If you find a good company at a good price, who cares what "the market" is doing?
When buying a great wonderful company, also ensure that the stock was reasonably priced.
Even a great company can be a bad investment if you pay too much for it.
If you find a good company at a good price, who cares what "the market" is doing?
Thursday, 8 March 2012
Warren Buffett: Time is ticking away
Source: Letters to shareholders 1989
Read more: http://www.businessinsider.com/warren-buffett-quotes-on-investing-2010-8?op=1#ixzz1oXEVskKF
Thursday, 1 March 2012
Buffett's Big 4 Investments in Marketable Securities - American Express, Coca Cola, IBM and Wells Fargo
- Finally, we made two major investments in marketable securities:
- (1) a $5 billion 6% preferred stock of Bank of America that came with warrants allowing us to buy 700 million common shares at $7.14 per share any time before September 2, 2021; and
- (2) 63.9 million shares of IBM that cost us $10.9 billion.
- 13.0% of American Express,
- 8.8% of Coca-Cola,
- 5.5% of IBM and
- 7.6% of Wells Fargo.
- (We also, of course, have many smaller, but important, positions.)
Comment: "Buying wonderful company at fair price" and "holding period is forever". This is classically Buffett's style.
We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects. Our share of their earnings, however, are far from fully reflected in our earnings; only the dividends we receive from these businesses show up in our financial reports. Over time, though, the undistributed earnings of these companies that are attributable to our ownership are of huge importance to us. That’s because they will be used in a variety of ways to increase future earnings and dividends of the investee. They may also be devoted to stock repurchases, which will increase our share of the company’s future earnings.
Comment: Buffett buys and holds for the long term. He keeps these companies for their long-term prospects, knowing that he will obtain good returns from these companies, either through the dividends they distribute or through the undistributed growing earnings attributable to the owners from its reinvested retained earnings.
- Had we owned our present positions throughout last year, our dividends from the “Big Four” would have been $862 million. That’s all that would have been reported in Berkshire’s income statement. Our share of this quartet’s earnings, however, would have been far greater: $3.3 billion. Charlie and I believe that the $2.4 billion that goes unreported on our books creates at least that amount of value for Berkshire as it fuels earnings gains in future years. We expect the combined earnings of the four – and their dividends as well – to increase in 2012 and, for that matter, almost every year for a long time to come. A decade from now, our current holdings of the four companies might well account for earnings of $7 billion, of which $2 billion in dividends would come to us.
Comment: Only the dividends received are reported in Berkshire Hathaways account. This is only a fraction (36%) of the actual earnings of $3.3 billion. Buffett opines that these dividends will continue to grow as the retained earnings fuel earnings gains in future years. I like the way Buffett projects the future earnings of these companies.
- For present earnings of $3 billion to grow to $7 billion in 10 years, he is projecting a CAG of 8.84%.
- Projecting the dividends of $862 million growing to $2 billion in a decade is the equivalent of the dividends growing at a CAG of 8.77% for the same period.
- The growth rates used in his projections are very conservative (8.84% and 8.77%). Maybe Buffett just uses his simple rule of thumb of doubling the earnings or dividends every 10 years.
- Once again, he reiterates that $1 retained earnings by the company should deliver at least $1 value to the shareholder.
Saturday, 25 February 2012
What is Warren Buffett's investing philosophy?
Buffett's investment philosophy has changed over time and can generally be thought of in two parts:
He has said that the latter philosophy is far superior to the former and that it took him far too long to realize it. Buffett's investment philosophy certainly evolved over the course of his investing lifetime, and did shift towards more of a focus on quality rather than cheapness, in part due to his association with and learning from his business partner Charlie Munger. The intellectual father - the "Benjamin Graham," if you will - of this quality focus was Phil Fisher. Generally, Buffett is a value investor; he studied under and worked for Benjamin Graham, the author of The Intelligent Investor and Security Analysis and the man generally considered the father of modern-day value investing, and credits Graham for much of his investment philosophy and success.
- Early Buffett (pre-1970): buy at a significant discount to intrinsic value. "Fair business at a wonderful price."
- Late Buffett (post-1970): buy companies at a price at or near intrinsic value, that can consistently increase their intrinsic value,. "Wonderful business at a fair price."
The best way to truly understand Buffett's investment philosophy is to read the following (links below):
1. His letters to investors from his early investment partnerships
2. His letters to shareholders of Berkshire Hathaway
3. The Intelligent Investor by Benjamin Graham
4. Common Stocks and Uncommon Profits by Phil Fisher
Early Partnership Letters (1959-1969):
Berkshire Hathaway Letters (1977-2010):
Intelligent Investor:
Common Stocks and Uncommon Profits:
http://www.quora.com/Warren-Buffett/What-is-Warren-Buffetts-investing-philosophy
Sunday, 5 February 2012
Patience - a fundamental investment discipline to have a lot of.
There is only one strategy that works for value investors when the market is high - PATIENCE.
The investor can do one of two things, both of which requires steady nerves:
1. Sell all stocks in a portfolio, take profits, and wait for the market to decline.
2. Stick with those stocks in the portfolio that have long-term potential.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall returns.
Comments:
When you buy wonderful companies at fair or bargain prices, you can often hold these forever. The earnings power of these companies ensure that your returns will be positive over the long term. You often do not need to sell, even if these companies are slightly overvalued as their intrinsic values in the future will probably be higher than the present prices. When the share prices of these wonderful companies go down in tandem with the market corrections or bear markets, you often have the chance to buy more at lower prices. The only action you should avoid is to buy these wonderful companies when they are trading at obviously overvalued high prices. A wonderful company can be a bad investment when you buy it at a high price.
The investor can do one of two things, both of which requires steady nerves:
1. Sell all stocks in a portfolio, take profits, and wait for the market to decline.
- At that time, many good values will present themselves.
- This may sound easy, but it pains many investors to sell a stock when its price is still rising.
2. Stick with those stocks in the portfolio that have long-term potential.
- Sell only those that are clearly overvalued, and once more wait for the market to decline.
- At this time, value stocks may be appreciating at slow pace compared with the frisky growth stocks, but not always.
But come the correction, be it sudden or slow, the well-chosen value stocks have a better chance of holding their price.
As for the hot stocks, when they take a hard hit the investor is cornered. If the stock is sold, the loss becomes permanent. The lost money cannot grow. If the investor hangs on to the deflated stock, the long trail back to the original purchase price will deeply erode the overall returns.
Comments:
When you buy wonderful companies at fair or bargain prices, you can often hold these forever. The earnings power of these companies ensure that your returns will be positive over the long term. You often do not need to sell, even if these companies are slightly overvalued as their intrinsic values in the future will probably be higher than the present prices. When the share prices of these wonderful companies go down in tandem with the market corrections or bear markets, you often have the chance to buy more at lower prices. The only action you should avoid is to buy these wonderful companies when they are trading at obviously overvalued high prices. A wonderful company can be a bad investment when you buy it at a high price.
Saturday, 4 February 2012
Warren Buffett Buys High Quality Companies
Warren Buffett loves high quality companies. He buys high quality business and holds them forever. Why? Because high quality companies do well in both good markets and bad markets.
GuruFocus' monthly Buffett-Munger Newsletter features the best Buffett-Munger bargains for today. These are companies of high quality, but that trade at far below their fair values.
Research shows that even in the "lost" decade from 2000 to 2009, high quality company stocks outperformed by more than 10% a year. GuruFocus' Buffett-Munger Screener is for high quality companies at reasonable prices.
In a recent interview Warren Buffett mentioned three companies that he finds attractive. Out of the three companies he mentioned, two of them are listed in GuruFocus' Buffett-Munger screener. Fortune magazine called this an "unintentional endorsement" from Warren Buffett.
GuruFocus' monthly Buffett-Munger Newsletter features the best Buffett-Munger bargains for today. These are companies of high quality, but that trade at far below their fair values.
Research shows that even in the "lost" decade from 2000 to 2009, high quality company stocks outperformed by more than 10% a year. GuruFocus' Buffett-Munger Screener is for high quality companies at reasonable prices.
In a recent interview Warren Buffett mentioned three companies that he finds attractive. Out of the three companies he mentioned, two of them are listed in GuruFocus' Buffett-Munger screener. Fortune magazine called this an "unintentional endorsement" from Warren Buffett.
Thursday, 5 January 2012
Long Term Stock Picks For Long Term Gain
It is quite unfortunate that there are no formal personal finance classes when we are younger because money is an essential part of life. Learning how to handle your finances and how to invest for yourself are very important life skills. If people learned these things at an early age, then they would have had a great start on having a stock portfolio with long term stock picks.
It might be hard to believe that young adults would be capable of picking winning stocks but if you know basic math and can read, that’s all you really need. Sometimes, people get ahead of themselves and overthink. They are persuaded by the latest news and hype. Perhaps the best way to pick stocks is through the eyes of an amateur and what go with what they can understand. After all, the stock market is the trading ground for everybody – investing beginners and so called experts.
Understanding a company’s business is fundamental in picking the best stocks. So often, people hear about a hot stock tip and trust the investment advice of others rather than doing their own homework. If you don’t understand what a company does, it becomes very hard in judging the intrinsic value of a company. You want to know the true value of a company so you know when to buy in and when is a good time to sell. If you don’t know at least that much, then it would be very hard for you to make money in the stock market. In fact, it becomes more likely that you would lose money.
The investment strategy of buying stocks at fair value or below came from Benjamin Graham and was further reinforced by Warren Buffett and the margin of safety investing method. By buying companies trading below its intrinsic value, it leaves room for error – or a margin of safety. And since Warren Buffett’s stock pick advice is to hold stocks for the long term, an investor with a cheap blue chip stock pick has the luxury of waiting it out until the price goes up again.
Most newbies looking for investing advice often wonder why they don’t just buy penny stocks and wait it out for the long haul if it is a simple matter of a waiting game. However, penny stocks are meant to be fast money in the stock market but it also carries a lot of risks as well. When the market is turbulent, the first thing that people will sell is their penny stocks (they will keep their blue chip stocks for as long as possible). If you are one of the traders trying to unload thousands of shares, good luck in finding a buyer. You just might be left in holding the bag. You can make lots of money day trading penny stocks but you can lose a lot of money too because of the sheer volume you would need to buy and sell to make it profitable on the smallest of fluctuations in stock price.
Another reason that penny stocks are not meant for the long term is that it is very hard to do fundamental analysis on new companies as that is generally what happens when start-ups want to generate money. With no track record, you cannot do proper stock analysis and that is why penny stocks are meant for trading and not investing.
And just like day trading penny stocks, there are other methods of making lots of money in the stock market quickly such as shorting stocks, buying and selling options and playing with currency arbitrage. Obviously, these ways of making money in the stock market work or else people won’t be doing them. As mentioned however, fast and easy money is obviously not without risks. And people often get far too ahead of themselves and create these complicated investment strategies when simple methods work best. Have you ever seen a monkey making stock picks? Sometimes, they beat the so called stock pick professionals so imagine what a young person can do with a little bit of knowledge and stock analysis.
If you truly want to learn how to invest in stocks, the person you should learn from is Warren Buffett. As mentioned, he thinks ahead in the future with his long term stock picks. There are a few reasons for his. He doesn’t get flustered and forced into selling when the stock market falls. In fact, recession stock picks are great when everyone is selling and you are buying because people are in a panic. This is a great way to buy undervalued stocks. That being said, is it a stock you’d be happy to hold in your portfolio for the long term? Buffett says that you should only buy something if you’re happy to hold if the stock market were to close for 10 years. Given this criteria, how many people’s stock picks would be filtered out? There are other criteria for Warren Buffett stock picks such as: does the company have a branding advantage over its competitors? In the case of one of Buffett’s most famous stock pick Coca Cola, “Coke” is synonymous with soft drinks. Pepsi and other brands cannot compete with it as a brand without throwing huge money into it. Coke is way ahead of the game in terms of being in the consciousness of its consumers worldwide. This is what Buffett calls his business moat and it is far reaching across the globe. This is how a huge behemoth of a soft drink company can still grow worldwide when you think it’s already plateaued. Buffett’s portfolio picked it up as a value growth stock in the late 1980s and it has done very well for him since then.
For this reason, this is why amateur investors can do quite well managing a do it yourself stock portfolio with their own stock picks. You don’t have to be on the lookout for the latest break out stocks. Truly, a portfolio composed of blue chip stock picks purchased when they are undervalued will make you rich once they rebound. It does take research to find these gems and patience but Warren Buffett has made a career of doing something just as simple instead of worrying about the noise of the market. If the greatest investor in the world imparts such wisdom to us, who are we to argue with Buffett’s stock picks?
http://warrenbuffettstockpicks.com/long-term-stock-picks-for-long-term-gain/
Friday, 30 December 2011
Only One Warren Buffett: Buffett's investing style is to buy great companies at reasonable prices.
Buffett is often thought of as a pure value investor, buying companies and shares only when they are dirt cheap. He does some of that, and his investments in Goldman and GE last year were an example.
But far and away Buffett's investing style is to buy great companies at reasonable prices. His simple definition of a great company is one which has a sustainable competitive advantage, like a railway, for example.
Price wise, he is not getting Burlington on the cheap. The Financial Times calls Burlinton's valuation "generous", but also says "Buffett is not a man to quibble (on price) when he sees something he likes".
Buffett imitators often try to buy shares in a company because they are cheap. Buffett himself concentrates on buying great businesses. The difference is chalk and cheese, and it's the reason why there's only one Warren Buffett.
Sunday, 10 January 2010
Warren Buffett's Priceless Investment Advice
Warren Buffett's Priceless Investment Advice
By John Reeves
December 9, 2009
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?
http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx
Read the rest of the article below...
Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.
Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).
Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?
The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.
Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.
How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.
Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.
The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.
It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.
So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.
Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.
He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.
If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.
By John Reeves
December 9, 2009
"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
If you can grasp this simple advice from Warren Buffett, you should do well as an investor. Sure, there are other investment strategies out there, but Buffett's approach is both easy to follow and demonstrably successful over more than 50 years. Why try anything else?
http://www.fool.com/investing/value/2009/12/09/warren-buffetts-priceless-investment-advice.aspx
Read the rest of the article below...
Two words for the efficient market hypothesis: Warren Buffett
An interesting academic study illustrates Buffett's amazing investment genius. From 1980 to 2003, the stock portfolio of Berkshire Hathaway (NYSE: BRK-A) beat the S&P 500 index in 20 out of 24 years. During that period, Berkshire's average annual return from its stock portfolio outperformed the index by 12 percentage points. The efficient market theory predicts that this is impossible. In this case, the theory is clearly wrong.
Buffett has delivered these outstanding returns by buying undervalued shares in great companies such as Gillette, now owned by Procter & Gamble. Over the years, Berkshire has owned household names such as Walt Disney (NYSE: DIS), Office Depot (NYSE: ODP), and SunTrust Banks (NYSE: STI).
Although not every pick worked out, for the most part Buffett and Berkshire have made a mint. Indeed, Buffett's investment in Gillette increased threefold during the 1990s. Who'd have guessed you could get such stratospheric returns from razors?
The devil is in the details
Buying great companies at reasonable prices can deliver solid returns for long-term investors. The challenge, of course, is identifying great companies -- and determining what constitutes a reasonable price.
Buffett recommends that investors look for companies that deliver outstanding returns on capital and produce substantial cash profits. He also suggests that you look for companies with a huge economic moat to protect them from competitors. You can identify companies with moats by looking for strong brands that stand alongside consistent or improving profit margins and returns on capital.
How do you determine the right buy price for shares in such companies? Buffett advises that you wait patiently for opportunities to purchase stocks at a significant discount to their intrinsic values -- as calculated by taking the present value of all future cash flows. Ultimately, he believes that "value will in time always be reflected in market price." When the market finally recognizes the true worth of your undervalued shares, you begin to earn solid returns.
Do-it-yourself outperformance
Before they can capture Buffett-like returns, beginning investors will need to develop their skills in identifying profitable companies and determining intrinsic values. In the meantime, consider looking for stock ideas among Berkshire's own holdings.
The financial media made a big fuss over Berkshire's $44 billion acquisition of Burlington Northern Santa Fe, which has caused some of his recent stock selections to fly under the radar. For instance, Buffett just opened a position in ExxonMobil (NYSE: XOM), which joins ConocoPhillips (NYSE: COP) to comprise Berkshire's oil and gas exposure.
It's easy to see why Berkshire likes this efficient operator. ExxonMobil boasts a rock solid balance sheet and broad geographic diversification. Furthermore, Exxon should only benefit if commodity prices increase -- a theme consistent with Buffett's recent railroad purchase. And if Buffett's buying history is any guide, you can be confident that Exxon shares are trading at a discount to their intrinsic value.
So what will Buffett buy next? Unfortunately, we'll have to wait until Berkshire files its next Form 13-F to know for sure.
Of course, that's the problem with following Buffett's stock picks -- we'll never know what he's buying today until long after the fact. In the meantime, another place to find great value-stock ideas is Motley Fool Inside Value. Philip Durell, the advisor for the service, follows an investment strategy very similar to Buffett's.
He looks for undervalued companies that also have strong financials and competitive positions. Philip is outperforming the market with this approach, used since Inside Value's inception in 2004. In fact, Philip's recommendation for December is a pick that Buffett would love -- an electric utility with stable free cash flow, strong competitive advantages, and a 4.3% dividend yield. To read more about this stock pick, as well as the entire archive of past selections, sign up for a free 30-day trial today.
If investing in wonderful companies at fair prices is good enough for Warren Buffett -- arguably the finest investor on the planet -- it should be good enough for the rest of us.
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