In 1956, Buffett started his investment partnership with $100; after thirteen years, he cashed out with $25 million. In mid-2004 his personal net worth had increased to $42.9 billion, the stock in his company was selling at $92,900 a share.
Early Influences
Warren Buffett’s approach to investing is uniquely his own, yet it rests on the bedrock of philosophies absorbed from four powerful figures: Benjamin Graham, Philip Fisher, John Burr Williams, and Charles Munger.
According to Graham: A true investment must have two qualities—some degree of safety of principal and a satisfactory rate of return. Graham reduced the concept of sound investing to a motto he called the “margin of safety”. The real test was Graham’s ability to adapt the concept for common stocks. The first approach was buying a company for less than two-thirds of its net asset value, and the second was focusing on stocks with low price-to-earnings (P/E) ratios. Graham said investors would benefit most if they find undervalued stocks.
Philip Fisher was another significant influence in Warren’s life. Warren learned the significance of investing in businesses having an above par potential, from Fisher. He also learned the importance for a company to have competent management. Firms that can increase profits and sales quicker than the market average impressed Fisher. He looked for companies that had high-potential products. These products were capable of allowing sales increases in the future. Such firms have higher profit margins. They’re also cost-effective and have healthy accounting controls.
William’s theory, known today as the dividend discount model, or discounted net cash-f low analysis. Buffett condensed William’s theory as: “The value of a business is determined by the net cash f lows expected to occur over the life of the business discounted at an appropriate interest rate.”
Investing principle’s
Warren Buffett ignored the stock market all through his career. As per Warren, buying shares in a firm and buying the firm are same. He buys firms which he knows well. Firm should hold positive potential for long run. Warren Buffett evaluates the managers on three dimensions rationality, candor and independent thinking. Management should operate in logical tenets. Warren Buffett works with the managers who are candid with their shareholders and to their employees. According to Warren, we should check the return on equity not the earning per share. We should always look for the firm which have excellent profit margin. We should look to owner’s earnings to get the true reflection of a value. We should buy the business when it at good discount relative to its value. According to Buffett, diversification serves as protection against ignorance. The more knowledge you have about your company, the less risk you are likely taking. Choose the best business available when managing the portfolio. There’s no need to dive
rsify it widely. Also, it’s not compulsory to cover all major sectors. Hold onto businesses you understand most and perform well.
Manish Thakur
(MBA-FA 2018-20)