Bryan Hoo's Blog - Posts Tagged "warrenbuffett"
Warren Buffett Methodology
Alright, it is lesson time again! We will talk about a great investor of all time which is Warren Buffett by today. Enjoy~😄
Who hasn't heard of Warren Buffett—one of the world's richest people, consistently ranking high on Forbes' list of billionaires? His net worth was listed at $80 billion as of Oct. 2020. Buffett is known as a business man and philanthropist. But he's probably best known for being one of the world's most successful investors. Which is why it's not surprising that Warren Buffett's investment strategy has reached mythical proportions. Buffet follows several important tenets and an investment philosophy that is widely followed around the globe. So just what are the secrets to his success? Read on to find out more about Buffett's strategy and how he's managed to amass such a fortune from his investments.
Buffett's Methodology
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. Keep in mind these are not the only things he analyzes, but rather, a brief summary of what he looks for in his investment approach.
1. Company Performance
Sometimes return on equity (ROE) is referred to as stockholder's return on investment. It reveals the rate at which shareholders earn income on their shares. Buffett always looks at ROE to see whether a company has consistently performed well compared to other companies in the same industry. ROE is calculated as follows:
ROE = Net Income ÷ Shareholder's Equity
Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to analyze historical performance.
2. Company Debt
The debt-to-equity ratio (D/E) is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.9 The D/E ratio is calculated as follows:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity
This ratio shows the proportion of equity and debt the company uses to finance its assets, and the higher the ratio, the more debt—rather than equity—is financing the company. A high debt level compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above.
3. Is the Company Public?
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their initial public offering (IPOs) in the past decade wouldn't get on Buffett's radar. He's said he doesn't understand the mechanics behind many of today's technology companies, and only invests in a business that he fully understands. Value investing requires identifying companies that have stood the test of time, but are currently undervalued.
Never underestimate the value of historical performance. This demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that a stock's past performance does not guarantee future performance. The value investor's job is to determine how well the company can perform as it did in the past. Determining this is inherently tricky. But evidently, Buffett is very good at it.
One important point to remember about public companies is that the Securities and Exchange Commission (SEC) requires that they file regular financial statements.
These documents can help you analyze important company data—including current and past performance—so you can make important investment decisions.
Okay, that is all from today lesson. More and more interesting topics will be discussed in the future. Stay Tune~🤓
#warrenbuffet #stockmarket #stocktrading #investment #valueinvesting
Who hasn't heard of Warren Buffett—one of the world's richest people, consistently ranking high on Forbes' list of billionaires? His net worth was listed at $80 billion as of Oct. 2020. Buffett is known as a business man and philanthropist. But he's probably best known for being one of the world's most successful investors. Which is why it's not surprising that Warren Buffett's investment strategy has reached mythical proportions. Buffet follows several important tenets and an investment philosophy that is widely followed around the globe. So just what are the secrets to his success? Read on to find out more about Buffett's strategy and how he's managed to amass such a fortune from his investments.
Buffett's Methodology
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. Keep in mind these are not the only things he analyzes, but rather, a brief summary of what he looks for in his investment approach.
1. Company Performance
Sometimes return on equity (ROE) is referred to as stockholder's return on investment. It reveals the rate at which shareholders earn income on their shares. Buffett always looks at ROE to see whether a company has consistently performed well compared to other companies in the same industry. ROE is calculated as follows:
ROE = Net Income ÷ Shareholder's Equity
Looking at the ROE in just the last year isn't enough. The investor should view the ROE from the past five to 10 years to analyze historical performance.
2. Company Debt
The debt-to-equity ratio (D/E) is another key characteristic Buffett considers carefully. Buffett prefers to see a small amount of debt so that earnings growth is being generated from shareholders' equity as opposed to borrowed money.9 The D/E ratio is calculated as follows:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity
This ratio shows the proportion of equity and debt the company uses to finance its assets, and the higher the ratio, the more debt—rather than equity—is financing the company. A high debt level compared to equity can result in volatile earnings and large interest expenses. For a more stringent test, investors sometimes use only long-term debt instead of total liabilities in the calculation above.
3. Is the Company Public?
Buffett typically considers only companies that have been around for at least 10 years. As a result, most of the technology companies that have had their initial public offering (IPOs) in the past decade wouldn't get on Buffett's radar. He's said he doesn't understand the mechanics behind many of today's technology companies, and only invests in a business that he fully understands. Value investing requires identifying companies that have stood the test of time, but are currently undervalued.
Never underestimate the value of historical performance. This demonstrates the company's ability (or inability) to increase shareholder value. Do keep in mind, however, that a stock's past performance does not guarantee future performance. The value investor's job is to determine how well the company can perform as it did in the past. Determining this is inherently tricky. But evidently, Buffett is very good at it.
One important point to remember about public companies is that the Securities and Exchange Commission (SEC) requires that they file regular financial statements.
These documents can help you analyze important company data—including current and past performance—so you can make important investment decisions.
Okay, that is all from today lesson. More and more interesting topics will be discussed in the future. Stay Tune~🤓
#warrenbuffet #stockmarket #stocktrading #investment #valueinvesting
