Friday, June 24, 2005
Investment Strategy
Warren Buffett
One of Warren Buffett's investment strategy is to look at simplicity itself :
"Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks and have a fortitude to hold steady during any short-term gyrations".
Buffett believes that rationality rules in all matters, including, first, how you identify an outstanding company. He applies three non-financial criteria:
One of Warren Buffett's investment strategy is to look at simplicity itself :
"Choose a few stocks that are likely to produce above-average returns over the long haul, concentrate the bulk of your investments in those stocks and have a fortitude to hold steady during any short-term gyrations".
Buffett believes that rationality rules in all matters, including, first, how you identify an outstanding company. He applies three non-financial criteria:
- It is simple and understandable
- It has a consistent operating history
- It has favorable long-term prospects
Buffett watches indicators that specifically relate to managerial excellence. He looks at:
- Return on equity ( not earnings per share )
- Profit margins ( which must be high )
Other criteria not covered above are,
- Debt/Equity Ratio - Has the company avoided excess debt? A high level of debt compared to equity can result in volatile earnings and large interest expenses.
- How long has the company been public? - Buffett typically considers only companies that have been around for at least 10 years.
- Do the company's products rely on a commodity? - Buffett tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that rely solely on a commodity such as oil and gas. If the company does not offer anything different than another firm within the same industry, Buffett sees little that sets the company apart. Any characteristic that is hard to replicate is what Buffett calls a company's economic moat, or competitive advantage. The wider the moat, the tougher it is for a competitor to gain market share.
- Is the stock selling at a 25% discount to its real value? - To check this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals, including earnings, revenues and assets. And a company's intrinsic value is usually higher (and more complicated) than its liquidation value - what a company would be worth if it were broken up and sold today. The liquidation value doesn't include intangibles such as the value of a brand name, which is not directly stated on the financial statements. Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth (price). If his measurement of intrinsic value is at least 25% higher than the company's market capitalization, Buffett sees the company as one that has value.
Source : Investopedia
High Dividends
Stocks that pay high dividends have historically delivered higher returns than the rest of the market, and stocks that increase dividends see their stock prices go up. On the other hand, stocks that pay high dividends grow earnings far more slowly (thus delivering less in price appreciation) and are often unable to sustain dividends in the long term. Therefore, a savvy investor will always consider growth potential and payout sustainability in addition to simply looking at current dividend yields when building a stock portfolio.
Source : WallStraitsComments : Now for the difficult part, EXECUTION :)
