Dubbed as the Oracle of Omaha, Warren Buffett is one of the richest business tycoons in the USA and the world. Constantly ranked at the top of Forbes’ billionaire list, as of October 2020, Buffett’s net worth was estimated to be $80 billion dollars. Buffett is more than just a philanthropist and a businessman, he is a wizard in the field of investment. Warren Buffett’s investment strategy has become legendary and world-renowned. Buffett sticks to a number of key principles and an investment philosophy that is widely adopted across the world. So, what exactly are the keys to his success? Keep reading to find out the making of the richest man in the world!
“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1” – Warren Buffett
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Warren Buffett: A Brief History
Warren Buffett was born in Omaha, Nebraska, in the year 1930. At a young age, he developed an interest in business and investment, especially in the stock market. Buffett began his schooling at the University of Pennsylvania‘s Wharton School before returning to the University of Nebraska to earn a bachelor’s degree in business administration. Buffett moved on to Columbia Business School to pursue his master’s degree in economics.
Buffett began his career as an investment salesman in the early 1950s, but in 1956 he founded Buffett Associates. He took control of Berkshire Hathaway less than ten years later, in 1965. Buffett declared his intention to donate his whole fortune to charity in June 2006. The Giving Pledge campaign was founded by Buffett and Bill Gates in 2010 to inspire other rich individuals to pursue philanthropy.
Buffett announced in 2012 that he had been diagnosed with prostate cancer. Since then, he has completed his therapy successfully. Buffett began working on a new healthcare firm with Jeff Bezos and Jamie Dimon, focusing on employee healthcare. Atul Gawande, a doctor at Brigham and Women’s Hospital, has been named Chief Executive Officer (CEO).
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”– Warren Buffett
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Philosophy of Warren Buffett
Buffett has invested in the Benjamin Graham Value Investing School. Value investors seek stocks with unjustifiably low prices compared to their intrinsic value. Even though there is no widely recognized method for calculating intrinsic value, it is sometimes calculated by analyzing a company’s fundamentals. The value investor, like bargain hunters, looks for companies that are undervalued by the market or stocks that are valuable but aren’t recognized by the majority of buyers.
Buffett proposed the idea of value investing to a new level. According to this idea, stocks always trade at their fair value, making it more difficult for investors to buy cheap stocks or sell them at inflated prices. They believe that the market will ultimately begin to favor those high-quality stocks that have been undervalued for some time.
Buffett, on the other hand, seemed unconcerned by the stock market’s supply and demand complexity. In reality, he is unconcerned by the stock market’s activities at all. This is what his famous paraphrasing of a Benjamin Graham quote indicates: “In the short run, a market is a voting machine but in the long run it is a weighing machine.”
He considers each company as a whole, therefore he selects companies exclusively on the basis of their total potential. Buffett doesn’t seek financial gain when he buys these stocks as a long-term investment, but rather ownership in elevated companies that can generate earnings.
“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” – Warren Buffett
Methodology of Warren Buffett
When evaluating the link between a stock’s level of excellence and its price, Warren Buffett asks himself certain questions to identify low-priced value. Keep in mind that these aren’t the only factors he looks at; rather, they’re a quick rundown of what he looks for in his investing strategy.
Return on Equity (ROE) or the Stockholder’s Return on Investment (SROI) indicates how much money shareholders make from their stock. Buffett compares a company’s ROE to that of other companies in the same industry to determine if it has consistently done well. The return on investment (ROI) is computed as follows:
ROE = Net Income ÷ Shareholder’s Equity
Note: It’s not enough to look at the ROE from the previous year. To assess historical performance, the investor should look at the ROE over the previous five to ten years.
Another important factor Warren Buffett always analyses is the Debt-to-Equity ratio (D/E). Buffett wants a short-term debt so that earnings growth is generated from shareholders’ equity rather than borrowed funds. The following formula is used to determine the D/E ratio:
Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders’ Equity
The greater the ratio, the more debt, rather equity, is used to fund the company’s assets. A high debt-to-equity ratio might result in fluctuating profitability and expensive interest costs. Investors may use solely long-term debt instead of total liabilities in the formula above for a more stringent test.
A company’s profitability is measured not just by its profit margin, but also by its ability to continuously increase it. By dividing net income by net sales, this margin is calculated. Investors should go back at least five years for a fair idea of past profit margins. A high profit margin shows that the firm is doing a good job of running its business, but growing margins indicate that management has been very efficient and effective in keeping costs under control.
“It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price.”– Warren Buffett
Understand the Company
Only companies that have been around for at least ten years are considered by Buffett. 10 As a result, most technology companies that have gone public in the last ten years wouldn’t even be on Buffett’s radar. He has stated that he does not comprehend the mechanics of many of today’s technological businesses and that he only invests in companies that he completely understands. Identifying companies that have stood the test of time but are now undervalued is a crucial element of value investing.
Never undervalue the significance of the past performance. This shows the company’s ability (or lack thereof) to enhance shareholder value. However, remember that a stock’s previous success does not guarantee future results.
“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”– Warren Buffett
This question may appear to be a radical approach to narrowing down a firm at first. Buffett, on the other hand, considers this a crucial topic. He avoids companies whose goods are identical to their competitors’ and those that rely entirely on a commodity like oil and gas (but not always).
Buffett sees little difference between a company and another company in the same industry if it does not provide anything unique. Buffett refers to a company’s economic moat, or competitive advantage, as any feature that is difficult to reproduce. A competitor’s ability to increase market share is more difficult the wider the moat.
Is the Company Cheap?
Finding companies that fulfill the other five criteria is one thing; deciding whether or not they are discounted is the most challenging part of value investing. And it’s Buffett’s most valuable asset.
To evaluate a company’s intrinsic value, an investor needs to evaluate a number of business factors, such as profits, revenues, and assets. And a business’s intrinsic value is generally larger (and more complicated) than its liquidation value, which is the amount of money a company would be worth today if it were split up and sold. Intangibles such as the value of a brand name, which is not clearly reflected on the financial statements, are not included in the liquidation value.
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Wealth & Philanthropy
Buffett was ranked the richest person in the world by Forbes in 2008, with an estimated net worth of $62 billion. After donating billions of dollars to charity, Buffett was rated as the second richest man in the United States in 2009, with a net worth of $37 billion, second only to Bill Gates. As of September 2013, his net worth had increased to $58.5 billion.
In a study conducted by the Carson Group in 1999, Buffett was named the top money manager of the twentieth century, knocking both Peter Lynch and John Templeton. He was named one of Time’s 100 Most Influential People in the World in 2007. President Barack Obama awarded the Presidential Medal of Freedom to him in 2011. Buffett was voted the most important global thinker in Foreign Policy, with Bill Gates in 2010.
He raised funds for Girls, Inc. by auctioning his 2001 Lincoln Town Car on eBay in 2006. In 2007, he auctioned a luncheon with himself for the Glide Foundation, which raised $650,100. Later auctions pulled in $2.1 million, $1.7 million, and $3.5 million, respectively. The winners usually have lunch with Buffett at Smith & Wollensky, a steakhouse in New York. Every year, the restaurant contributes at least $10,000 to Glide to host the lunch.
Susan Buffett’s Susan Thompson Buffett Foundation, Susan Alice Buffett’s Sherwood Foundation, Howard Graham Buffett’s Howard G. Buffett Foundation, and Peter Buffett’s NoVo Foundation are among the personal charities that Warren Buffett continues to assist finance and promote. Warren Buffett also backed his sister’s Letters Foundation and Learning By Giving Foundation.
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In this blog, we learned about Warren Buffett and why he is called the Wizard of Omaha. Buffett’s investment strategy is similar to that of a bargain hunter, as you’ve surely seen. It has a practical, down-to-earth vibe about it. Buffett maintains this approach in other aspects of his life as well: he doesn’t live in a mansion, doesn’t collect vehicles, and doesn’t go to work in a limousine. Value investing has its critics, but whether you agree with Buffett or not, the evidence is in the dish. Follow Leverage Edu and read more about some of the famous personalities and educational content