is a transcript of an article that appeared in the
November/December volume of Wealth Creator magazine.
In the article, John summarizes the main features
of Buffett's investment methods.
Over the past decade Professor Price has been
reading everything written by and about Warren Buffett.
With his background as a research mathematician, his
aim has been to develop a clear step-by-step approach
so that everyone can benefit from his methods. The
result is investment software called Conscious Investor®.
Using his research and based on the methods of
Warren Buffett, Conscious Investor is designed to
help find long-term investments in quality companies
selling at the right price. With default
or user-defined settings, Conscious
Investor scans through ten years of fundamental data
of all stocks in the ASX and over 6,000 USA stocks.
These stocks are then analyzed in more detail
using proprietary analysis and graphing tools to calculate
their return under different “margins of safety”.
If the return is inadequate, a unique feature of Conscious
Investor establishes the difference between the economic
value of the business and the price being asked for
by the market. This enables investors to take full
advantage of market volatility.
Conscious Investor also has on-line data downloads,
instructional Viewlets and subscriber forums. Everything
is designed to bring success to your investing in
terms of profitability with more enjoyment and less
It is a basic principle
of success to learn from the most successful. Without a
doubt, Warren Buffett, the Chairman and CEO of the USA company
Berkshire Hathaway, is the world’s greatest investor.
This genius of long-term investing has a track
record that stands alone. Suppose you invested $10,000 in
one of his original partnerships back in 1956 and rolled
it over into Berkshire Hathaway when they terminated in
1969. Today that investment would be worth over $280 million
— after all taxes, fees and expenses.
The following are what I consider are the
five main keys to Buffett’s methods of investing.
Businesses that you understand: Focus
on areas that you have the most background in or the
most interest in. Often this will mean from a consumer’s
perspective. Buffett, for example, does not invest in
tech companies because he says that he does not understand
the market for their products or services. He focuses
on “consumer” foods, newspapers, insurance
companies and retail furniture stores.
Strong economic moat: Look for companies
that have a protection against their competitors. This
could be geographical, patents, brand name, entry costs,
and so on. When companies have a strong economic moat,
then financial forecasts can be more reliable. An example
is Westfield Holdings. When they build a new shopping
mall, particularly in outer suburban areas, then it
is unlikely that another mall will be built nearby.
Sales and earnings growth: You can still
get good returns from companies that have poor growth
figures if they pay out most of their earnings as dividends
or use them for share buybacks. Nevertheless, at least
a reasonable level of growth is often important for
the management and employees to have a sense of achievement
which then translates into higher productivity and less
unrest. I also look for companies with earnings that
have a high stability of sales and earnings growth.
Return on equity: If you think of equity
as your money, then return on equity is a measure of
how well management is doing with your money. It is
virtually impossible for a medium to long-term investment
to be satisfactory if the return on equity is low. Look
for companies that have 15 percent or more return on
equity and return on capital.
Not too much debt: If debt is too high,
then the company is vulnerable to credit squeezes and
may have difficulty in raising money for expansion.
Using keys such as this, Buffett is looking
for what I call great companies. These are companies that
have done well in the past and have all the hallmarks of
doing well in the future.
Another important aspect of Buffett’s
approach is that he buys stocks as if he will be holding
them for the rest of his life. I think it is a little like
getting married. When you pop the question, your intention
is that it is going to be a marriage for the rest of your
life. It might not end up that way, but this is what guided
On a number of occasions Buffett has referred
to himself as a “Rip Van Winkle” investor, an
investor whose “favourite time frame for holding a
stock is forever.”
The final stocks are those with characteristics
such as described above: high return on equity and return
on capital, low debt, healthy capital structure, and stable
strongly growing earnings and sales. These are quality businesses
that are potentially great investments so long as they can
be purchased at a reasonable price.
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