Ah. What to call him? Manager? Investor? Best business partner or best teacher of Commerce? I don’t know. But I am sure what is he telling through his 12 Tenets is simply great.
1. Is the business easy and understandable? The business Warren Buffett looks at must be easy and understandable to him. For example, the business of Coca Cola is very understandable: soft drinks. Geico’s business is insurance. Warren Buffett holds significant shares of both companies.
2. Does the company have consistent operating history? Warren Buffett only trusts companies that are in their business for a long time.
3. Does the business have long-term favorable prospects. In other words, the company’s business must have sustainable favorable prospects.
Management Tenets: management must be smart
1. Is the management rational in business decisions? For decisions like how to allocate earnings, Warren Buffett like management that’s rational in allocating earnings.
2. Is the management candid to shareholders?
3. Can be management resist industrial imperative?
1. High profit margins
2. Focus on high return on equity (not earnings per share) & low price to earnings (P/E) ratio
3. Calculate “owners earnings”
4. For every dollar retained, make sure the company has created one dollar market value.
1.What is the intrinsic value of the business?
2. Can the shares be purchased at a significant discount off its intrinsic value (margin of safety)?