WARREN BUFFETT'S INVESTMENT PRINCIPLES

Warren Buffett does not readily disclose the investments he makes on behalf of h
imself or Berkshire Hathaway. He does, every year, report on the substantial hol
dings of his company in other corporations. These provide only tiny clues howeve
r to why, when and where he invests.
He is prepared, however, and does so regularly, to outline general principles of
sound investment. These have a consistent theme and can be summed up like this.
Stock investments should be looked at in the same way as buying a business. The
stock investor is really buying a tiny share or partnership and should apply the
same principles that they would in buying a business
the Benjamin Graham approa
ch:
1. The company should be soundly managed. Tests of good management include:
Share buybacks
Good use of retained earnings
Sticking to what you know
2. The company has demonstrated earning capacity with a likelihood that this wil
l continue. Tests of earning capacity include:
Company growth
Dealing with inflation
Capital expenditure
Look through earnings
Brand names
3. The company should have consistently high returns. Warren Buffett would look
at both:
Returns on equity
Returns on capital
4. The company should have a prudent approach to debt.
5. The businesses of the company should be simple and the investor should have a
n understanding of the company.
See case studies
6. Assuming that all these thresholds are satisfied, the investment should only
be made at a reasonable price, with a margin of safety. This is always a matter
for independent judgment by the investor but it is relevant to consider:
Price/earnings ratios
Earnings and Dividend yields
Book value
Comparative rates of return
8. Investors need to take a long term approach.