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Learn from the best when you invest

by John Price

The following 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 stress.

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 your decision.

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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Disclaimer:

Conscious Investing provides general advice and information, not individually targeted personalised advice. Advice from Conscious Investing does not take into account any investor’s particular investment objectives, financial situation and personal needs. Investors should assess for themselves whether the advice is appropriate to their individual investment objectives, financial situation and particular needs before making any investment decision on the basis of such general advice. Investors can make their own assessment of the advice or seek the assistance of a professional adviser.

Investing entails some degree of risk. Investors should inform themselves of the risks involved before engaging in any investment.

Conscious Investing endeavours to ensure accuracy and reliability of the information provided but does not accept any liability whatsoever, whether in tort or contract or otherwise, for any loss or damage arising from the use of Conscious Investing data and systems. Past performance is not necessarily indicative of future results. Information and advice provided here is not an offer to buy or sell securities. View the full Disclaimer.

 

 

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