Warren Buffett is unquestionably the greatest investor who has ever lived. He possesses an uncanny ability to choose incredible investments that explode in value over time. This ability has earned him a place as the second wealthiest man alive today.
Despite his vast wealth, Warren continues display a public persona of humility and common folk wisdom. This attitude has provided him the respect of working people as well as the ultra rich; a very rare combination in this day and age. He does not believe in personal or family dynasties and has pledged to give away 99% of his wealth in his will.
How Did Buffett Get So Wealthy?
Buffett learned his investing skills from Benjamin Graham, David Dodd and Phil Fisher. He claims to be 85% Graham and 15% Fisher is his stock picking philosophy.
His basic investing concepts are the following:
1. Look at stocks as individual businesses
2. Use the market’s fluctuations to your advantage
3. Be certain that there is a margin of safety built into all your investments.
This stock picking method is widely known as value investing.
Value investing adheres to the idea of buying stocks that are under priced per fundamental analysis. In other words, stocks are bought at a discount to their intrinsic proper market price. This discount is what Buffett considered the margin of safety.
The best part about Buffett is his willingness to share his tactics and stock picking methods with everyone. He really lays everything on the line so savvy investors are able to follow in his footsteps. Not only does Buffett hold no secrets, he publishes a yearly investor letter that explains the minutia of his thought process.
His most recent letter carefully laid out the six things he insists upon prior to acquiring another company. This criterion is easily applicable to every stock investor when choosing companies for investment.
Here are Warren Buffett’s Six Acquisition Rules
Buffett does not mess with small companies. The company need to produce a minimum of $75 million in pre-tax earnings.
He has no interest in speculation when it comes to earnings. In other words, future earnings, management forecasts, and any other future projections are not considered when making decisions. Earning ability MUST be proven and consistent to spark any interest.
3. Little to No Debt
The bottom line is that Buffett hates debt. The company must be earning solid returns without taking on debt. Debt, while needed in some circumstances, is a profit killer. Let the company pay off its initial debt first and prove itself before placing your first dollar at risk. When in debt, companies can take unwise risks during slow times. This potential simply creates too much risk to make a safe investment.
There needs to be an experienced management team already in place before an investment is made. Buffett has no interest in supplying management to run the company. Management should be pedigreed with experience in prior positions or trained from the company itself. Buffett looks for smart, talented people who can solve or better yet avoid problems.
You must be able to fully understand the businesses you are investing in. If the company or its business is too complicated, avoid it. Obviously, this rule can be bent as a stock market investor. While it is best to understand a company and its business completely, it’s not a hard and fast rule. This rule goes hand in hand with Peter Lynch’s mantra of buying what you know.
6. The company must be listed with a price
While this Buffet rule is not applicable to average stock investors it is important to understand. Buffett does not buy companies without an asking price. This goes back to belief in only buying sure things. Firms without an asking price require too much negotiation effort to be worthwhile to Buffett. Individual investors can apply this rule by only investing in listed companies. Avoid investing directly in firms that are private or not listed on a stock exchange. While these firms can be wildly lucrative, the unknown risk factors are sky high.
The Take Away
Warren Buffett is the greatest investor of all time. Everyone can learn by studying his investing rules. Make a point of reviewing his past writings and reading his yearly investor letters. The key to his most current wisdom is to avoid companies with debt and to embrace companies with consistent earnings.