The Warren Buffett approach to investing could be summed up in the phrase ‘value investing.’ This school of investing is all about finding securities that have some measure of inherent worth, but with very low prices attached. Essentially, the Warren Buffett approach is all about finding hidden gems and bargains among all of the securities that are available today.
Analyzing a Company’s Debt
Warren Buffett doesn’t look for companies that have no debt. These are companies that will probably borrow money at some point, rather than benefiting from the equity of shareholders. However, Warren Buffett does avoid investing in companies that have landed into excessive debt. The debt level should not be high relative to the level of equity.
Choosing Companies Based on Age
Warren Buffett is not interested in the upcoming companies that may or may not succeed. He invests in companies that went public ten years ago at least, giving him enough data to analyze and giving the companies in question a proven track record.
Analyzing a Company’s Performance Record
The return on equity is an important gauge for a company’s performance. Warren Buffett looks at the return on equity that companies have generated over the course of five or ten years.
Penalizing Reliance on Commodities
Warren Buffett avoids investing in companies that have products that rely on commodities like gas and oil. The price of gas and oil will fluctuate, leaving the products in question hugely vulnerable to even slight shifts in the marketplace.
Analyzing the Measurements Attained Over a Long Period of Time
Some investors look at the companies who seem to be on a hot streak in recent years. Warren Buffett looks at their performance since their early days, taking into account what they have done since they went public. He invests in the companies who have a proven track record.
Valuing Unique Companies
Some companies manage to survive while barely being different from their competitors. Warren Buffett avoids those companies, and chooses the ones that can genuinely offer something different compared to many of their competitors.
Increasing Profit Margins
Warren Buffett looks at companies that have had high profit margins to begin with, but which also specifically have profit margins that are increasing. He cares about the upward trend and not just about whether the set point is elevated.
Finding Undervalued Companies
It is legitimately difficult to find companies that are undervalued in any way, but Warren Buffett has a successful track record of doing so. It should be noted that the intrinsic value can include characteristics like the strength of a brand name and advertising strategy. It should be higher than the company’s market capitalization.
Warren Buffett has a financial intelligence approach that could certainly be described as practical. For him, financial success is about minimizing risk. All investing involves some risk, but the Warren Buffett approach to value investing manages to allow people to give themselves the best chance of succeeding. Individuals who want to learn more about value investing can visit: pmleadership.net/PPI