Creating Wealth the Warren Buffet Way

May 3, 2009 by admin
Filed under: Stocks

Most small business owners love their businesses as much as they love to make money.

It’s fun, rewarding and fulfilling to run your own show. But if the opportunity arose to make some money outside of their business, my guess is that any business owner would jump at the chance.

A lot of business owners dabble in the stock market, but, like the rest of us, don’t know much about the complexities of the financial markets.

The good news is, they don’t have to. Creating wealth through the stock market isn’t rocket science.

Don’t take my word for it. Take Warren Buffet’s word for it. He’s made billions in stock — and made it look easy.

So what’s the secret to Warren Buffett’s investment success?

The secret, according to the Sage of Omaha, is that there is no secret. “All there is to investing,” he says, “is picking good stocks at good times and staying with them as long as they remain good companies.”

Buffett has done that in spades over the past 40 years - at the helm of Berkshire Hathaway, one of the most successful investment companies in the history of Wall Street. The $44 billion company is like a block of
granite in an otherwise fragile investment environment. Astute investments in brand-name value plays like Coca-Cola, H&R Block, American Express and Comcast have fueled Berkshire Hathaway’s rise to the top of the global investment period. All solid, no-nonsense companies that offer investors the three things that Buffett prizes in his investment picks: steady growth, good management and no surprises.

Buffett’s results speak for themselves. A $10,000 investment in Berkshire Hathaway in 1965 would be worth nearly $30 million by 2005. In contrast, $10,000 in the S&P 500 would have risen to roughly $500,000. Consequently, Buffett is a Zen-like figure to both Wall Street and Main Street. Business writers and stock market analysts jot down his every utterance. Berkshire Hathaway annual meetings are almost mythical events, with a small army of Berkshire investors - and Buffett zealots - hanging on his every word. And he always delivers.

Prior to Berkshire Hathaway’s six-hour annual general meeting in May 2002, investors began lining up for seats at 4 a.m. Attendees were not disappointed. Among the treats? A film of Berkshire Hathaway chief Warren Buffett playing a ukulele and singing, “When the NASDAQ’s down, you’ll never frown, Berkshire’s here to stay.” In typical fashion, the folksy Buffett later led a visit to the local Dairy Queen down the street, which, by the way, he owned.

So what strategies does Buffett deploy when picking stocks – and more importantly, what can we learn from them?

For starters, he looks for companies with solid financial performance managed by seasoned and savvy executives. Buffett also favors companies with histories of above-average earnings growth. His holdings in American Express and Coca-Cola are good examples of that.

Here’s a good list of other things Buffett looks for when buying stocks:

Simple Businesses. Buffett likes to keep things simple - and he likes his companies to do the same. Again and again, Buffett has railed against the kinds of companies that seem too complicated or that are
Difficult to valuate. His avoidance of Internet and technology companies during the Dot-Com bubble is the most famous manifestation of his “keep it simple” dictum. That’s why Buffett jokingly calls himself a techno-phobe, but in reality he shies away from technology and telecom stocks.
Return on Equity. Another key criterion for Buffett is a company’s return on equity (ROE). There, he favors a 10-year plan, where he can predict ROE 10 years out. Companies that can’t be gauged accurately don’t make it into the Buffett portfolio.
Cash on the Barrel.The Buffett Way is long on companies that have deep pockets. Companies that have what Buffett refers to as ample cash flow are companies that have plenty of financial resources both to pay their bills and to keep growing.
Low Debt.Companies that can limit and manage their debt are high on Buffett’s priority list. Insurance companies (he owns both Geico and General Re) are particular favorites in this regard. With the Buffett Way, low debt equals significant room for growth.
Emphasis on Value. Historically, Buffett has targeted investments in undervalued companies with good long-term growth potential. Identifying such companies isn’t easy, but Buffett has mastered the technique. In a nutshell, Buffett favors stocks that are unjustifiably low based on their intrinsic worth. He bases his calculations of intrinsic worth by analyzing a company’s fundamentals. As with most bargain hunters, Buffett targets companies that are good revenue producers and are capably managed, though underpriced.

Warren Buffett is the quintessential American success story. What makes him unique is that he genuinely believes there is a success story in every American, just waiting to blossom.

If, that is, the owners of those success stories spend a lot of time doing what Buffett does: digging for those “cigar butt” companies that offer value to discerning investors.

To Buffett, it’s value that counts - and he’s spent the past 40 years proving that to be true.

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