Tenets of the Warren Buffett Way Business Tenets
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
- 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)
- Is management candid with its shareholders? (every company makes mistake. Managers who confess mistakes publicly is more likely to correct them.)
- 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’)
- Focus on return on equity, not earnings per share.
- Calculate “owner earnings.”
- Look for companies with high profit margins.
- For every dollar retained, make sure the company has created at least one dollar of market value.
- What is the value of the business?
- Can the business be purchased at a significant discount to its value?