Warren Buffett's Investment Principles

Warren Buffett does not readily disclose the investments he makes on behalf
of himself or Berkshire Hathaway. He does, every year, report on the
substantial holdings of his company in other corporations. These provide only
tiny clues however 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

 1. The company should be soundly managed. Tests of good management
include:

• Share buybacks
• where it has surplus funds;
• where it can buy them back at
  a price below intrinsic value
• Good use of retained
  earnings
• Sticking to
  what you know

2. The company has demonstrated earning capacity with a likelihood that this
will 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 an 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/earnins ratios
• Earnings and Dividend yields
• Book value
• Comparative rates of return

8. Investors need to take a long term approach.

This study was perfomed and posted at buffettsecrets.com