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Tuesday, June 28, 2011

Warren Buffett’s Investing Style

Warren was against diversified portfolio; according to him diversified portfolio was an excuse to hide investor’s ignorance. Warren says investor should invest in companies that make products which are well understood by investors.
Warren first identified what to buy and then let the stock price to determine whether it should be bought.
For warren the intrinsic value of an investment is the projected CAGR which investment is supposed to produce.
Warren made long term investment in only those shares where earnings were predictable to a high degree of certainty.Berkshire hatchway, the holding company of warren, used to trade around $ 8,200 in January 1990 while by this date the share is  trading at $ 1,13,600, this means CAGR of 13%.
The price paid by the investor determines the rate of return on the investment, lower the price, higher shall be return and the vice versa; this is one the tenets of Warren Buffett which he always followed.If we look at some of stocks which belonged to Warren Buffett at some time or other, all of them carried higher ROE of 30 and above.Coca-Cola and American Express both were sporting ROE more than 30%. But ROE can be manipulated by higher leverage that means company having too much debt in comparison with equity, which gives better ROE even for a sick company.
Apart from ROE and Debt -to-Equity ratio, Warren emphatically watched for NPM (Net Profit Margin) which shows how much a company is earning on its sales.
In future posts I shall throw more light on Warren’s investment style.


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