He does not like organizations that gain a lot in some years and lose even more in others. He looks for a history of steadily increasing earnings, which indicate that the particular company is well and carefully managed. Buffett would consider the evolution on the Return on Equity and Return on Capital ratios in order to determine how the company has performed in the past. In 1977, he said that 'Since businesses customarily add from year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share.'
Buffett does not like debt, especially in the form of long-term debt, so he will not invest in companies with such characteristics. Long-term debt means that any increase in the interest-rate could seriously affect the company's profits and make future cash-flows unpredictable. Buffett said on one occasion, in 1987, that 'Good business or investment decisions will eventually produce quite satisfactory economic results, with no aid from leverage. It seems to us both foolish and improper to risk what is important (including, necessarily, the welfare of innocent bystanders such as policyholders and employees) for some extra returns that are relatively unimportant.'
One of the most interesting features of Buffett's investing techniques is buying value companies at discounted prices, since the public thinks their best days are past. One of the best examples is the investment he did into Coca-Cola in the 1970's, when all other investors thought its heydays were over.
Of course that applying these principles involves a considerable amount of work and research. Warren Buffet takes a very long time before buying a company, since he analyses it from all points-of-view. Purchasing a business is a long-term affair for Buffett. When he decides to invest, he spends a lot of money and wants all of it to bring back even more.
People tend to think that, since Buffett is so huge an investor and since he is so rich, he must hold stock in many companies....
Actually, and quite surprisingly, Buffett invests in remarkably few companies, when we think about his multi-billion dollar fortune. His carefully made analysis and his commitment to the companies he buys makes him want to hold a particular investment for many years, if not a lifetime. His wealth and the degree of security he imposes help him achieve this objective.
Since he prefers companies that expand on earnings, it obvious that he likes growth-oriented companies. Dividends so not attract him to much (since he is already rich). The consequence is that the taxes he pays are considerably smaller. Profits are better spent, according to Buffett, if they are directed into growth. This philosophy is held responsible for about 40% of Buffett's amazing returns. The Berkshire Hathaway he holds has compounded at about 23% each year. An analysis reveals the fact that, "had it paid dividends instead of reinvesting for capital growth, the return would have been less than 16%.." In 1992, Buffett stated that "Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value."
Still, his concepts are not applicable to every investor. Most people require diversification and a fair share of dividends. However, Buffett's ideas are a worthy source of inspiration.
Reference:
Warren Buffett Secrets - http://www.buffettsecrets.com/index.htm
Jones, Edward, "The Secret of Warren Buffett's Success," Women in Business, 00437441, Mar/Apr99, Vol. 51 Issue
Braverman, David, "Applying the Oracle of Omaha's Wisdom" Business Week Online, 8/5/2004
Stires, David. Fortune, "The Warren Wannabes," Fortune, 11/11/2002, Vol. 146 Issue 9, p85, 2p, 3c; (an 7697886)
What Would Warren Do Now?" Business Week Online, 11/19/2002, pN.PAG, 00p;
Jones, Edward, "The Secret of Warren Buffett's Success," Women in Business, 00437441, Mar/Apr99, Vol. 51 Issue
