Summarizing the Warren Buffett Way of Investing
The Warren Buffet Way of investing has become an extremely popular book for investors. There are 12 principles outlined that Warren Buffet (the author) goes by when making investment decisions.
Here is a summarized outline of some of those principles:
1. The Ability to Understand the Business Warren Buffett did not invest in any business that he could not comprehend. It was his feeling that being able to understand a business is what enables you to see when there are problems or positive occurrences.
2. History of Reliable Operation Even though Warren Buffett was aware of the fact that a fine past history wouldn't ensure success, he would still take a company's history into account when trying to determine whether or not a business could get through various market fluctuations.
3. The Possibility for Long Term Success The Warren Buffet Way of investing is to avoid fads or companies that will not be as popular in the long term. Buffet was more inclined to invest in companies that showed some promise of a clear long term future.
4. Proper Management Buffet believed in the importance of a strong management team. He focused particularly on how management handled the excess money that was generated. Anything that is made above the average returns is supposed to get reinvested in order to construct a shareholder value. If that is not possible then the money is to be returned to the shareholder in the form of a dividend or anything else that management may see fit. Every decision needs to be rational.
5. Open Relationships Between Management and Shareholder
Management must be able to admit if they have made a mistake and take responsibility for rectifying the situation.
6. Importance of Return on Equity
According to Buffett, earnings were of less importance than the return on equity when evaluating a targeted company. He would look at how it would affect the wealth of the company on a long term basis.
7. Importance of the Owner's Earnings
The Warren Buffett Way of Investing is to make determinations based upon future capital expenditures while disregarding cash flow. This is the best way to get a proper estimation of the company's value.
8. Importance of Profits
Buffett would not invest in a company that failed to turn sales into profits. Also, Buffett would stay away from companies with inflated expenses, even if they were highly profitable. He considered this to be a sign of a lack of discipline. What mattered most was if the company had the ability to control its expenditures.
9. Creating Dollar Market Value
The company should have been able to create dollar market value for each dollar that has been obtained, as well as retained. If they haven't been able to do this, it is a sure sign of incorrect allocation of capital. Now there is no shareholder and market value. At this point, Buffett sees it as pointless to hold anything with them.
The Warren Buffett Way of Investing has brought many people financial success, so it wouldn't hurt to implement some of these principles into your financial life and see if you find success as well.
Article Source: FxTradingStock.com
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by: Joe Maldonado
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Date: Fri, 11 Mar 2011
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