Business tenets:
1. Is the business easy
and understandable? The business Warren Buffett looks at must be easy and
understandable to him. For example, the business of Coca Cola is very
understandable: soft drinks. Geico’s business is insurance. Warren Buffett
holds significant shares of both companies.
2. Does the company have
consistent operating history? Warren Buffett only trusts companies that
are in their business for a long time.
3. Does the business have
long-term favourable prospects. In other words, the company’s business must
have sustainable favourable prospects.
Management Tenets:
management must be smart
1. Is the management
rational in business decisions? For decisions like how to allocate earnings,
Warren Buffett like management that’s rational in allocating earnings.
2. Is the management
candid to shareholders?
3. Can be management
resist industrial imperative?
Financial Tenets:
1. High profit margins
2. Focus on high return on
equity (not earnings per share) & low price to earnings (P/E) ratio
3. Calculate “owners
earnings”
4. For every dollar
retained, make sure the company has created one dollar market value.
Value Tenets:
1. What is the intrinsic
value of the business?
2. Can the shares be
purchased at a significant discount off its intrinsic value (margin of safety)?
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