Sum of Some

"Analyzing the Experts"

An Overview of Warren Buffett

Period of Reign: 1951-current

Associated With: Berkshire Hathaway

Highlights: Started his own partnership at the age of 26, with personal wealth of $140,000 ($650,000 adjusted for inflation in 2008), and grew his personal wealth to $1,025,000 ($4,000,000 adjusted for inflation in 2008) in 6 years (by age 32).  This is a return of nearly 58%/year.  Buffett will go on to become the richest man in the world next to Bill Gates through his work with Berkshire Hathaway. 

Quotes: Warren Buffett quotes at wikiquote

Terms-Coined: Economic Moat. A moat-company is one which has products that consumers will pay more for in relation to a generic product of equal quality.  An example would be Coca-Cola.  Commodity companies are those that consumers will not pay extra for, such as salt.

Post-Success: Buffett has committed to giving away 80% of his wealth.  In 2006, he gave $30 billion to the Bill & Melinda Gates Foundation.

Warren Buffett investing style summarized

• Is the company in a strong industry, and do they have a monopoly, or command loyalty?
• Does the company provide strong and consistent margins in terms of owner earning
• Is the company low on debt?
• Does the company have high and consistent returns on invested capital?
• Does the company retain earnings for purposes of growing the organization or other good business opportunities?
• Does the company have low maintenance and capital expenses?
• Is the company free to adjust prices for inflation?

Warren Buffett Books

To be added.

Additional Warren Buffett Resources

• Direct from the mouth of Buffett, the Berkshire Hathaway website contains Warren’s letters to shareholders and other communications from the man himself
• Biographical and background information on Warren Buffett
• A detailed look at the investment style of Warren Buffett based on the questions Buffett says he asks himself about the companies he is considering
• A statement issued by Peter Lynch in the aftermath of 9/11 where he reiterates his beliefs about long term investments in the market
• Buffett chatting with MBA students regarding his personal strategies, and anecdotal stories with his typical sense of humor.

Stock Screen Parameters to Mimic Warren Buffett Investment Style

The below bullet points attempt to recreate Warren Buffett’s investment style using technical parameters that can automatically be screened.  These parameters are from an interpretation by Harry Domash based on the book “The New Buffettology”, and were run using the MSN stock screener.  The text in italics explains how the parameter was defined in the screener.

1) Returns: Find companies with a consistent return on equity (ROE), but eliminate the companies that are high in debt, and which may be increasing their ROE by increasing their debt through capital expense

Parameter: ROE: 5-year Average >= 17%
Parameter: Return on Invested Capital: 5-year Average >= 17%

3) Profit Margins: Find companies with high profit margins, especially compared to others in the same industry.  To negate tax rates, use the pre-tax profit margins

Parameter: Pre-tax Profit Margin: 5-year Average >= 1.2 * Industry Average Pre-tax Profit Margin: 5-year Average

4) Value: Find companies that you don’t overpay for.  Buffett’s valuation method of “owner earnings” is similar to price-to-cash flow

Parameter: Price/Cash Flow Ratio <= .8 * Industry Average Price/Cash Flow Ratio
Parameter: Price/Cash Flow Ratio >= 0.1

5) Debt: Eliminate companies that are high in debt compared to others in their industry

Parameter: Debt to Equity Ratio <= .8 * Industry Average Debt to Equity Ratio

6) Management: Find companies that are well managed.  High paid employees may be an objective guage for good management

Parameter: Income Per Employee >= 1.1 * Industry Average Income Per Employee