Who is Warren Buffett?
Warren Buffett is one of the richest people in the world. His fortune is estimated at USD 117.4 billion (as at March 2022). He is known as one of the most successful investors in the world. Buffett follows the investment strategy of value investing, which can be traced back to Benjamin Graham. This investment strategy involves looking for securities that are unjustifiably undervalued. Warren Buffett is also the CEO of Berkshire Hathaway.
Warren Edward Buffett was born on August 30, 1930 in Omaha, Nebraska. From an early age, he was interested in the business world and investing, including in the stock market. Even at a young age, Warren Buffett liked to buy products cheaply and sell them at a premium. Initially, Buffett sold Coca-Cola, chewing gum and weekly magazines door-to-door in 1936. Buffett charged a mark-up on the products for delivery. In 1945, Buffett and a friend bought a pinball machine and set it up in a barbershop. Within a very short time, the friends owned several machines in different barber stores. They were eventually able to sell the business. At the age of 11, Buffett bought his first shares. He also bought these at a low price and sold them on at a premium. At 14, he bought a farm, which he leased out. At the age of 17, he restored an old Rolls-Royce with a friend and rented out the car on a daily basis.
Buffett began his education at the Wharton School of the University of Pennsylvania before returning to the University of Nebraska, where he earned a bachelor’s degree in business administration. Buffett later attended Columbia Business School, where he graduated with a degree in economics. At Columbia Business School, Warren Buffett learned about fundamental analysis and value investing as a student of Benjamin Graham. After graduating, Buffett attended the New York Institute of Finance.
Buffett began his career in the early 1950s as an investment salesman and founded Buffett Associates in 1956. Less than 10 years later, in 1965, he took control of Berkshire Hathaway. In 1982, the company merged with Blue Chip Stamps (an investment and discount stamp company). As a result of the merger, Charlie Munger became Vice Chairman of Berkshire Hathaway.
In June 2006, Buffett announced his intention to donate his entire fortune to charity. In 2010, Buffett and Bill Gates announced that they had launched the Giving Pledge campaign to encourage other wealthy individuals to become philanthropists.
In 2012, Buffett announced that he had been diagnosed with prostate cancer. However, he has since successfully completed his treatment. Recently, Buffett began working with Jeff Bezos and Jamie Dimon to develop a new healthcare company focused on employee healthcare. The three have hired Brigham & Women’s physician Atul Gawande as Chief Executive Officer (CEO).
Warren Buffett’s strategy
In general, Warren Buffett follows the value investing approach. Value investors look for securities whose price is unjustifiably low in relation to their intrinsic value. The intrinsic value of a company can be determined using many methods. In most cases, value investors analyze the fundamentals of a company. Like bargain hunters, value investors look for stocks that are considered undervalued by the market or stocks that are valuable but not recognized by the majority of other buyers.
Warren Buffett views each company as a whole and therefore selects stocks solely on the basis of their overall potential as a business. Since Buffett holds these stocks for the long term, he does not seek capital gains, but rather holdings in quality companies that are capable of generating income. When Buffett invests in a company, he is not concerned with whether the market will eventually recognize its value. He is concerned with how well that company can make money as a business. Among other things, Warren Buffet looks at the following key figures when selecting companies:
Undervaluation
Determining whether a stock is undervalued can be a challenge. To do this, an investor must determine the intrinsic value of a company by analyzing a number of business fundamentals such as earnings, revenues and assets. Determining intrinsic value is more difficult than determining liquidation value, as the latter does not take into account intangible assets such as the value of a brand. This means that both quantitative and qualitative analyses are required to determine the intrinsic value. These analyses require experience and a broad range of specialist knowledge and it may be worth commissioning a specialist to carry them out. A good, specialized asset manager is able to analyse the intrinsic value of a company and can provide you with the best possible support when choosing your shares.
Buffett compares the intrinsic value of the company with the current market capitalization. If this is lower than the intrinsic value, the investment is worthwhile. Buffett has a far above-average ability to determine the intrinsic value of a company, which ultimately determines the success of this investment strategy.
Return on equity
The return on equity (ROE) is a measure of a company’s financial performance. It is calculated by dividing net profit by equity. As equity corresponds to a company’s assets less its liabilities, the return on equity is regarded as the return on net assets. Return on equity is a measure of a company’s profitability and the efficiency with which it generates profits. Sometimes the return on equity (ROE) is also referred to as the return on capital for shareholders. It provides information on how high the shareholders’ return on their shares is. ROE is therefore used to see whether a company has consistently generated good returns compared to other companies in the same industry. As an investor, the return on equity should be viewed over a longer period of time.
Debt-equity ratio
The gearing ratio measures the indebtedness of a company. The gearing ratio is calculated by putting total debt in relation to total assets. This involves calculating the percentage of a company’s assets that are financed by debt. A figure above 1 indicates that the company has more liabilities than assets. A high ratio indicates that in the event of a sudden rise in interest rates, there is a risk that the company will no longer be able to service its loans. A ratio below 1 means that a greater proportion of a company’s assets are financed by equity. Buffett prefers a low level of debt so that profit growth is generated from equity and not from borrowed money.
Profit margins
The profit margin is one of the most frequently used profitability ratios. It measures the degree of profitability of a company or business activity. In general, profit margins indicate what percentage of sales are profit. In other words, the figure indicates how many centimes of profit the company generates from each franc of sales. The profitability of a company depends not only on a good profit margin, but also on a growing profit margin. Several years should therefore also be considered in the analysis. A high profit margin indicates that the company is managing its business well and increasing profit margins mean that the management has been efficient and successful in controlling costs.
Stock exchange listing
As a rule, Buffett only considers listed companies that have been traded on the stock exchange for at least 10 years. Therefore, most technology companies that have gone public in the last decade would not appear on Buffett’s radar. Buffett argues that he does not understand the mechanics behind many of today’s technology companies and only invests in a business that he fully understands. Value investing requires identifying companies that have stood the test of time but are currently undervalued. The Securities and Exchange Commission requires that publicly traded companies provide audited financial statements. These financial statements can help in analyzing the companies.
Competitive advantage and dependence on raw materials
Warren Buffett tends to avoid companies whose products are no different from those of their competitors and those that rely exclusively on a commodity such as oil and gas. Exceptions prove the rule, as his large investment in Occidental Petroleum shows. This, as well as the investment in the technology company Apple, also shows Warren Buffett’s flexibility and ability to learn. Warren Buffet pays particular attention to ensuring that a company stands out from other companies in the same sector. After all, this also represents the competitive advantage. The greater the competitive advantage, the more difficult it is for the competition to gain market share.