Look away, audience... this is where I'm storing personal notes about Buffett's investment strategy for future reference. Not funny, not witty, just a bit inspired.
Successful investing approaches stock purchase as though buying a business, pretending as if the decision can't be undone for ten years. To do any less is to speculate, and yield to temptation of short-term price movements that belie the true future prospects of a company.
12 Tenets of Buying a Business
1. The business should be simple and understandable. Cable T.V., not the human genome, you know?
2. The business should have a consistent operating history. Not a new start-up. Not wild fluctuations.
3. Favorable long-term prospects. "Franchises" are better than those in a commodity-type market.
4. Rational management. Reinvest earnings in the company. Few acquisitions of unrelated companies.
5. Candid management. Disclose each business separately, not consolidate. Disclose your mistakes too!
6. Management avoids mindless imitation of peers.
7. Focus on return on equity, not price per share. A/B, where A = operating earnings - capital gains, B = securities at cost, not market value. Little or net debt.
8. Focus on owner earnings. That is, net income + depletion, depreciation, amortization - capital expenditures.
9. Look for high profit margins. Good cost management.
10. $1 premise. Each $1 of retained earnings should create at least $1 of market value.
11. Value. Discount future anticipated cash flows at long term U.S. government bond rate, without a risk premium.
12. Attractive price. The value should be at least 25% discount to the market price.
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