The Warren Buffett Way

by Robert G. Hagstrom

He thinks about the business, the people who run the business, the economics of the business, and then the value of the business, and in each case he lays what he learns against his own benchmarks. I labeled them investment tenets and divided them into four categories: business tenets, management tenets, financial tenets, and market tenets.

‘Most men would rather die than think. Many have.’

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now. Over time, you will find only a few companies that meet those standards—so when you see one that qualifies, you should buy a meaningful amount of stock.”

American Express was one of the biggest casualties of what became known as the salad oil scandal. The company lost $58 million and its share price dropped by over 50 percent. If Buffett had learned anything from Ben Graham, it was this: When a stock of a strong company sells below its intrinsic value, act decisively.

Tenets of the Warren Buffett Way Business Tenets Is the business simple and understandable? Does the business have a consistent operating history? Does the business have favorable long-term prospects? Management Tenets Is management rational? Is management candid with its shareholders? Does management resist the institutional imperative? Financial Tenets Focus on return on equity, not earnings per share. Calculate “owner earnings.” Look for companies with high profit margins. For every dollar retained, make sure the company has created at least one dollar of market value. Market Tenets What is the value of the business? Can the business be purchased at a significant discount to its value?

Focus on return on equity, not earnings per share. 2. Calculate “owner earnings” to get a true reflection of value. 3. Look for companies with high profit margins. 4. For every dollar retained, make sure the company has created at least one dollar of market value.

“I would rather be vaguely right than precisely wrong.”