From the literature of Warren Buffett’s approach to company analysis and stock market investment, we read that, amongst other considerations, he advocates the following.
These may come as a surprise to some who frequent these Value Boards ....
A) Diversification, the practice of owning shares in many different companies, is not necessarily the right way to invest. He asks, "Why put your money into your 20th. best choice, rather than putting more into your top 5 or 10 companies at a 'bargain' price ?" He recommends Portfolios of no more than about 10 stocks. Needless to say, one needs to have the confidence in, and the courage of, one’s "Fundamental Analysis Convictions".
B) Ignore the Macro events, and rather concentrate on the business specific Micro events. Concern yourself with the long term prospects of a business rather than attempting to predict the short term fate of the stock market. He says, "Ask yourself, are you an analyst of the National Economy, or are you a Business Analyst ?"
C) Ignore Stock Market forecasts. Stay at the Company level, rather than the Market level. He prefers to focus on the performance of a Business, and not to be distracted by larger trends that are often impossible to forecast with any degree of accuracy. Stay with what's "Understandable and Knowable". If either of the two are missing, pass it up.
D) Be Fearful when others are Greedy, and Greedy when others are Fearful. Be wary of investing when prices are rising irrationally, and they bear little relationship to the actual value of the underlying business. The IT bubble of the 90’s was a good example. However, being mindful that stocks must always meet your selection criteria, Buy when people are selling, and Sell when people are buying.
E) Some investors believe that a Contrarian Investing Strategy is superior to following the crowd. Buffett disagrees, because if the crowd is doing the wrong thing, going 180 degrees in the opposite direction may be no better. This is investing based on Polling rather than Thinking. He states, "Never substitute Popular Wisdom for Independent Thinking".
F) Buffett scorns the 'Efficient Market Theory' (EMT) which holds the premise that every share is exactly where it should be, because all the pushes and pulls of the Marketplace have led to that conclusion, so there’s no need to dig deeper !!!
In 1973 the Marketplace valued the Washington Post at $100mil. Buffett saw $400mil. to $500mil. History has shown who was correct.
Technical Analysis relies heavily on EMT. Warren Buffett sees very little value in this form of analysis. He stated, "If history revealed the path to riches, librarians would be rich", and "I'd be a bum on the street with a tin cup if the markets were always efficient". Anyone know of a Technical Analysis practitioner who is worth over $40 Billion ?
....... ALL OF THE ABOVE, plus much more, can be found in the book "How Buffett Does It" written by James Pardoe.
Feel free to enter into constructive debate and discussion on this Board regarding any aspect of the stock market, especially if you can align yourself with what’s written above.
Because I find it of interest to look into the stock choices of others, I will make my own comments about those companies without reference to the author. Once again, feel free to have your own say in this regard. It could be that we may well discover something we previously missed, or didn’t consider.
My own approach to individual company analysis tends to rely on the K.I.S.S. principle, and my "first pass" tends to target the following specific areas of the Income Statement and Balance Sheet. These are combined into target percentages which a company MUST SIMULTANEOUSLY meet or exceed for further consideration.
If I comment on an Industrial type stock it will, in general, be on the basis of the following specifics.......
• Interest Expense
• Profit Before Tax
• Net Income
• Capital Employed = Employment of Capital (which is :- Total Assets - Total Current Liabilities)
• Share Capital & Retained Income
• DPS (If any)
Benjamin Graham stated, in the Preface to his book 'The Interpretation of Financial Statements' ... "if you have precise information as to a company's present financial position and its past earnings record, you are better equipped to gauge its future possibilities. And this is the essential function and value of Security Analysis."
• STOCK PORTFOLIO.
I believe I’ve recently achieved, WITHIN THE LAST YEAR, viz. 2007, and with
a portfolio of LESS THAN 10 stocks, the 40% per annum Capital Gain
target I referred to between Messages #24195 and #24225 at "Value Investing".
(dd 3 Jan. 2008).
For details, go to :-
• FUNDAMENTAL VALUE ANALYSIS.
A respected contributor to this Board, The Ox, suggested, in Message #470 below, that I add a link to this
Header regarding "EBITDA Margin".
Here it is, followed by several others added over the course of time ....
EBITDA Margin :-
Pretax Profit/Capital Employed :-
Pretax Profit/Capital Employed revised ratio :-
Interest Expense/EBITDA :-
• ---- WARREN BUFFETT'S INTERPRETATION OF FINANCIAL STATEMENTS ----
• WHAT BUFFETT LOOKS FOR :-
(a) ... in the INCOME STATEMENT
(b) ... in the BALANCE SHEET
(c) ... in the CASH FLOW STATEMENT
• HOW BUFFETT VALUES A COMPANY :-
... BUFFETT'S 'EQUITY BOND' THEORY
• BUFFETT'S COMPANY ANALYSIS TEMPLATE
• ---- WHY BUFFETT BELIEVES STOCKS BEAT GOLD and BONDS ----
From great work done by E_K_S :-
Here are some recent Value investing books that others have recommended and discussed ....
SI Member's Portfolio vs. Buffett Portfolio
(A) Invitation :-
(B) Rules :-
(C) FINAL Combined Votes Received :-
34 Votes :- APA
31 Votes :- GLW, PH
28 Votes :- UNP
26 Votes :- ROC
25 Votes :- CMI, JOY
24 Votes :- AAPL, DIS
23 Votes :- SLW
22 Votes :-
21 Votes :-
20 Votes :- AMAT
18 Votes :- F
16 Votes :- CL, VZ
14 Votes :- PM
12 Votes :- SPLS
(D) Comments :-
(a)To find out WHY a stock has been RECOMMENDED I suggest putting the stock code into the "Search this Subject" box at the top of the page and hit the button alongside.
Alternatively you can go to the following Board to see a summarised list of stock recommendations ...
(E) FINAL PORTFOLIOS
SI PORTFOLIO - TOP 10 :- AAPL, APA, CMI, DIS, GLW, JOY, PH, ROC, SLW, UNP
BUFFETT PORTFOLIO :- AXP, COP, IBM, JNJ, KFT, KO, PG, USB, WFC, WMT
SI PORTFOLIO - 8 LOSERS :- ADM, AMAT, CL, CSX, F, PM, SPLS, VZ
(F) SI PORTFOLIO CHALLENGE (17 August 2012) in Google Docs.
TO VIEW THE LATEST UPDATE FOR THE PORTFOLIOS, visit :-
VIEW PORTFOLIO CHARTS, courtesy of The Ox :-
SI Portfolio - Top 10
SI Portfolio - 7 Losers
(G) SI TOP 10 PORTFOLIO & EXTRAS - BUFFETT & GRAHAM PARAMETERS
(H) GRAHAM NUMBER SPREADSHEET by E_K_S
An hour long Interview with BENJAMIN GRAHAM, held back in 1976.
The more some things change, the more they can also stay the same.
Of interest could be his use of the AAA Bond Rate, his view on the 'Random Walk' theory and "Efficient" Markets, and what he thought of "Wall Street people" .....
COMPANY RESEARCH, published on another web site, by SI Members.
(1) Seeking Alpha articles by Sergio H :-
If you've published a company analysis or recommendation on another web site and you would like to share it, then let me know and I'll post it here in my board's header.
According to Warren Buffett's statements in a BLOOMBERG interview, ...
---> "INVEST ....... DON'T SPECULATE." <---
---> " 'Mr. MARKET' IS THERE TO SERVE YOU .... NOT TO INSTRUCT YOU." <---
(A) Buffett prefers To Invest In companies that have CONSUMER MONOPOLIES, namely Businesses that :-
(1) Make products that wear out fast or are used up quickly,
(2) Provide repetitive service that manufacturers must use to influence the public to buy their products,
(3) Provide repetitive consumer services that are consistently in need,
(4) Retail stores that have acquired a regional quasi-monopoly position.
Consumer Monopolies are usually noted by a Brand Name Product or Service that consumers believe offers Superior Advantages over Any of its competition. The price competition between the merchants destroys the merchant's profit margins, BUT IT DOES NOT DESTROY THE PROFIT MARGIN of the manufacturer i.e. the CONSUMER MONOPOLY.
The CONSUMER MONOPOLY has far greater control of setting the price of its product or service and thereby making its desired profit.
(B) Buffett prefers Not To Invest In a company that is a COMMODITY TYPE BUSINESS, such as :-
(2) Raw foodstuff producers, e.g. corn & rice
(3) Steel producers
(4) Gas & Oil
(5) Lumber industry
(6) Paper manufacturers
(7) Automobile manufacturers
These companies sell a commodity for which there's Considerable Competition in the marketplace. Therefore THE PRICE of the product becomes THE PRIMARY FACTOR for the consumer in making a Buy decision.