Warren Buffett – Investing Tenets

Tenets of the Warren Buffett Way Business Tenets

  1. Is the business simple and understandable?
  2. Does the business have a consistent operating history?
  3. Does the business have favorable long-term prospects?

Management Tenets

  1. Is management rational? (that is what decision management made before publishing annual report – continue invest in low return biz, buy growth, or return to shareholders. The rational choice is to return to shareholders)
  2. Is management candid with its shareholders? (every company makes mistake. Managers who confess mistakes publicly is more likely to correct them.)
  3. Does management resist the institutional imperative? (why is capital allocated so poorly? why annual reports only trumpet success? Thinking independently and charting a course based on rationality and logic are more likely to maximize profit than a strategy called ‘follow the leader’)

Financial Tenets

  1. Focus on return on equity, not earnings per share.
  2. Calculate “owner earnings.”
  3. Look for companies with high profit margins.
  4. For every dollar retained, make sure the company has created at least one dollar of market value.

Market Tenets

  1. What is the value of the business?
  2. Can the business be purchased at a significant discount to its value?

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