WARREN BUFFETT
Buffett is known as the worlds greatest ever investor and here are some of the rules
that he follows:
Commonsense Investment Rules
1. Have a written or mental note of your investment plan and have the discipline
to follow it.
2. Be flexible enough to change or evolve your investment strategies when sound
judgement and conditions so warrant.
3. Study sales and earnings of a company and how they are derived.
4. Focus on your purchase candidate. Understand the firm s products or services,
the company s position in its industry, and how it compares with the
competition.
5. Learn as much as possible about the people managing the business.
6. When you find a great stock value, don t be swayed by predictions for the
stock market or the economy.
7. Sit on the sidelines in a cash position if you can t find investments of value
based on your criteria. Many emotional investors make the mistake of buying
at very high prices relative to value.
8. Define what you don t know as well as what you do know and stick to what
you know.
Evaluation Rules
1. Is the business understandable?
2. Are the CEO and top executives focused and capable based on the firm s
previous track record of sales and earnings and how the business is run?
3. Does management report candidly to shareholders?
4. Does the company have top quality, brand name products used repeatedly and
high customer loyalty?
5. Does the company have a wide competitive edge and barriers to potential
competition?
6. Is the business generating good owner earnings; free cash flows?
7. Does the business have a long-term history of increasing sales and earnings at
a favourable rate of growth?
8. Has the company achieved a 15 percent or better return on shareholders equity
and a return that compares favourably with alternative investments?
9. Has the company maintained a favourable profit margin compared with the
competitors profit margin?
10. What are the goals of the business and the plans to achieve them?
11. What are the risks of the business?
12. Does the business have good financial strength with low or manageable debt
requirements?
13. Is the stock selling at a reasonable price relative to future earnings and price
potential?
GLOSSARY
Net Profit Margin = Net Income
Sales
Operating Profit Margin= Operating Earnings before Interest, Depreciation and Taxes
Sales
Book Value Per Share= Assets- Liabilities
Number of Shares Outstanding
Return on Shareholders equity = Net Income
Common stock equity
Debt to capital ratio = Long-Term Debt
Long-Term debt + Shareholders Equity