- Warren Buffett believes in owning good businesses long-term.
- He prefers buying entire businesses to influence decisions.
- Buffett also invests in stocks for more choices and bargains.
- He sees himself as a business analyst, not a market analyst.
- Buffett focuses on business operations, profitability, and management.
- Hagstrom simplified Buffett’s investing into 12 principles.
- These principles fall into four categories: business, management, financial, market.
- The first business rule: the business must be simple and understandable.
- Buffett avoids complex or unfamiliar businesses he doesn’t understand.
- He prefers companies with a stable, long history of operations.
- Consistent growth and profits over years are key for Buffett.
- He favors industries like railroads, energy, and insurance.
- Buffett looks for businesses with long-term prospects and a moat.
- A moat is a durable competitive advantage protecting profits.
- Great companies can stay strong for 25-30+ years.
- Buffett avoids commodities with undifferentiated products.
- Management must act rationally and in shareholders’ best interest.
- Honest, competent managers are crucial for Buffett’s investments.
- Managers should allocate capital wisely to maximize shareholder value.
- Buffett values high return on equity and reinvestment efficiency.
- He prefers companies that reinvest earnings at high rates or return capital to shareholders.
- Share buybacks are favored over dividends for returning capital.
- Buffett looks for management transparency and candor.
- Managers should resist copying competitors and think independently.
- Good management is critical but hard to judge directly.
- Tips include reviewing past reports and comparing peers.
- The second category: financial principles focus on returns and earnings.
- Return on equity should be steady or rising over time.
- A ROE above 10% indicates an efficient business.
- High profit margins show cost control and cash flow strength.
- Owner’s earnings adjust net income for capital expenditures.
- High profit margins and ROE are signs of quality.
- The fourth financial rule: retained earnings should create at least $1 of market value.
- Buffett’s $1 rule: retained earnings should boost market value dollar for dollar.
- The true value of a business is based on discounted future cash flows.
- Buffett compares intrinsic value to market price for buying decisions.
- He looks for stocks trading below their intrinsic value.
- Market prices swing wildly, but true value is more stable.
- Buffett uses conservative assumptions to estimate value.
- Coca-Cola is a prime example of Buffett’s successful investment.
- Coca-Cola’s simple business model and long history make it attractive.
- Buffett bought Coca-Cola at a fair price with a margin of safety.
- He valued Coke based on future cash flows and growth assumptions.
- Buffett’s investment in Coke grew significantly over time.
- He held onto Coke through market fluctuations, focusing on intrinsic value.
- Buffett’s approach emphasizes patience, understanding, and rationality.
- Focused investing in a few high-quality companies is key.
- Holding long-term allows unrealized gains to compound tax-free.
- Emotional control is vital; avoid overconfidence and loss aversion.
- Investors should be prepared for market ups and downs.
- Long-term holding increases chances of positive returns.
- Buffett’s example: buying Coca-Cola in 1988 was a great move.
- He ignored short-term market noise, focusing on business value.
- The key is to buy good businesses at attractive prices.
- Buffett’s principles help identify and avoid bad investments.
- The goal is to invest with a margin of safety and patience.
- Overall, Buffett’s approach combines simplicity, discipline, and long-term thinking.