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Warren Buffett: How He Does It

investopedia.com

Buffet's Way

Buffett follows the Benjamin Graham school of value investing, which are :

  1. Look for securities whose prices are unjustifiably low based on their intrinsic worth.
  2. Look at companies as a whole - company performance, company debt, and profit margins, whether companies...

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Buffet's Investing Philosophy

  1. Buffett takes this value investing approach to another level.
  2. Many value investors do not support the efficient market hypothesis (EMH) . This theory suggests that stocks always trade at their fair valu...

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Buffett‘s Methodology

  1. Warren Buffett finds low-priced value by asking himself some questions when he evaluates the relationship between a stock's level of excellence and its price.
  2. Keep in mind these are not the only things he analyzes, but rather, a brief summary of what he looks for in his investment...

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1. Company Performance

  1. Sometimes return on equity (ROE) is referred to as stockholder's return on investment.
  2. It reveals the rate at which shareholders earn incom...

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3. Profit Margins

  1. A company's profitability depends not only on having a good profit margin, but also on consistently increasing it.
  2. This margin ...

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2. Company Debt

  1. The debt-to-equity ratio (D/E) is another key characteristic Buffett considers carefully.
  2. Buffett prefers to see a small amount of debt so that earnings growth is being generated from

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4. Is the Company Public?

  1. Buffett typically considers only companies that have been around for at least 10 years.
  2. As a result, most of the technology companies that have had their initial public offering (IPOs) in the past decade wouldn't get on Bu...

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5. Commodity Reliance

  1. You might initially think of this question as a radical approach to narrowing down a company. Buffett, however, sees this question as an important one.
  2. He tends to shy away (but not always) from companies whose products are indistinguishable from those of competitors, and those that...

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6. Is it Cheap?

  1. This is the kicker. Finding companies that meet the other five criteria is one thing, but determining whether they are undervalued is the most difficult part of value investing. And it's Buffett's most important skill.
  2. To check this, an investor must determine a company's

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6. Is it Cheap? (cont.)

  1. Once Buffett determines the intrinsic value of the company as a whole, he compares it to its current market capitalization - the current total worth or price.
  2. Sounds easy, doesn't it? Well, Buffett's success,...

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The Bottom Line

  1. As you've probably noticed, Buffett's investing style is like the shopping style of a bargain hunter.
  2. It reflects a practical, down-to-earth attitude.
  3. Buffett maintains this attitude in other areas of hi...

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