KATHMANDU: Warren Buffett is known as the most successful investor. Buffett, chairman and chief executive officer of investment company Berkshire Hathaway, has a long history of investing. Buffett made his first investment at the age of 11. Therefore, Buffett's style of investing has been followed by many investors. There is no shortage of people who feel more comfortable investing by listening to his investment experience and participating in various lectures.
Buffett was born in 1930 in Omaha, USA. Buffett, who has been interested in business since a young age, has an undergraduate degree in business and a degree in economics. He started his career as an investment salesperson in the early 1950's. Founded Buffett Associates in 1956. Less than 10 years later (1965), he took over Berkshire Hathaway.
Buffett's philosophy
Warren Buffett has been using Benjamin Graham's Value Investing more. Graham is also known as Warren Buffett's mentor. Value Investors find and research stocks that are trading below their actual value. Undervalued shares are chosen by the value investor based on the market price. Buffett has taken value investment to the next level.
Buffett does not care about the supply and demand cycle of the stock market. In fact, Buffett does not care about the overall stock market activity. He analyzes each company as a whole. They also base the overall potential of the company when picking shares. So Buffett does not pursue capital gains. He prefers to own companies with special properties that can increase profits.
Buffett method of company selection
Warren Buffett has been examining various bases to assess the level of superiority of the stock and the market price. After careful analysis of these bases, he chooses a company. Here's a look at some of the things Buffett analyzes when choosing shares.
1 Company performance
Return on Equity (ROE) provides information on the rate at which an investor can get a return on equity investment. Buffett always analyzes the ROE to see if a company is consistently performing better than other companies in the same area.
Equity is obtained by subtracting liabilities from total assets. And mathematically, the ROE is obtained by dividing the net profit by the total equity. It is not considered appropriate to invest only in the last one year. Investors should analyze the ROE of at least the last 10 years.
2. Companies Loan
Another feature of Buffett's in-depth study before choosing an investment is the company's debt to equity (DE) ratio. This ratio summarizes the company's liabilities and equity. Buffett wants the company's earnings or profits to be produced from equity invested by shareholders, not borrowed money. So Buffett always chooses companies with low debt.
Debt to equity ratio is found when the total equity of the company is divided by the total equity. This indicates how much the company is operating on loan and how much on its own assets. This ratio helps to determine if the company is indebted. A higher DE ratio indicates that the company is in high debt.
3 profit margin
The profitability of a company depends not only on a good profit margin but also on its ability to grow continuously. Profit margin indicates what percentage of the business has turned into profit. In a general sense, such a percentage figure shows how much money is made by trading 1 rupee.
To get a good idea of the company's profit margin, you need to study the profit margin for at least 5 years. It is learned that the company has been doing good business with high profit margins. But rising margins are also effective in controlling the company's management costs.
4 How many years ago did the company issue IPO? And is it in operation?
Buffett chooses only companies that have been in existence for more than 10 years. Therefore, Buffett has not invested in most of the IT companies that have issued IPOs in the last 10 years. An important aspect of value investing is to choose companies that have stood the test of time but are immediately undervalued. Buffett has also been in business for a long time and has been investing in companies where he has been doing business.
5 Competitiveness of the company
Buffett does not like to invest in a company that focuses on a single product. For example, oil and gas. To compete with other companies, Buffett is reluctant to invest in companies that do not have a wide range of products and services. Companies with competitive advantage tend to be more likely to choose Buffett. In other words, Buffett invests in companies in the same field that offer different and unique products or services.
