Warren Buffet is one of the richest men in the world. He has held a position among the top investors for many years. He is also a man who has been heavily involved in philanthropic work. Buffet has also proven to be a great collaborator in business as he has worked with Bill Gates and Jeff Bezos on different projects. His philosophy and strategy have definitely worked for him for the many years he has been in business. Most people have wondered how he has been able to have such a profound investment strategy. So how exactly does he do it?
Warren Buffet’s PhilosophyÂ
Warren Buffet uses a system where he follows the value of a security. He has indeed admitted that he goes for value investing and that is how he is able to get securities of low intrinsic value and grow them to valuable assets. Investors have different approaches when it comes to identifying and nurturing such securities. In the stock market, he does not exactly consider the market forces when he is acquiring assets. He just goes for the lowly valued assets and trusts the ability of the market to recover. This strategy is usually risky but rewarding for investors with patience. As reported by Admiral Markets, a lot of insight is needed to ensure a capital gain is realized. Buffet values ownership more than market conditions and that is how he manages to get returns on the investment in the long-term.
Buffets investment process
Warren Buffet follows practical business techniques to choose the kind of businesses that he invests in. this is in line with what most investors do as well. Every shrewd investor considers the return on equity (ROE) when calculating the time that the investment will yield profits. In short, Buffet aims to:
- Trims down the investment opportunities to a sizeable selection that only comprises of companies whose future prospects can be estimated
- Do away with companies that have a poor management team
- Estimate the value of the remaining companies and buy them at the least price possible
While there are quite a number of companies where it is not possible to estimate certain factors, Buffet makes his investment process completely foolproof so that he is only left with companies that he is sure about. He values the figures, variables and assessment processes.
The economics behind Buffets methodology
In short, Warren Buffet follows actual economic models to estimate the value of his investments in the long run. He does this by calculating the net income expected as well as that which has already been recorded by the company before. The process also involves investigating whether the company has any remaining liabilities. Liabilities are an extra burden that could cause problems in the future of any investment. While the best option is to go for companies that have zero debts and liabilities, the margins can also determine whether a company is worthy or not. Companies with little debt margins can be viable too as long as the margin does not affect the total value.
Buffet also considers the prevailing profit margins. A company with increasing profit margins offers the perfect opportunity for growth. Other than that, the duration that the company has been in the public is also important. Most companies that have only existed in the market for a short time are hard to evaluate. Those that have been in the market for a while but are undervalued are great for investment as the brand already has traction.
Another issue that factors in Warren Buffet’s model is the uniqueness of the products that the company produces. Companies with unique products are easily sellable. Those that have stiff competition though are much tougher to sell. In case the company that is in consideration is listed, the stocks must be selling at a much lower price than they should be. This is the most important part of the opportunity for any eligible company.
ConclusionÂ
In summary, Warren Buffet focuses on the basics of his investment style. He does not look down on any investment no matter how small it might be. The most important thing for him is that the investment opportunity presents an opportunity for growth. For Buffet, the long-term value of an opportunity is what matters and not its current value. This investment style is very unpresuming and it has allowed him to grow many undervalued businesses into big companies.
