Oracle of Omaha
What it is:
Thanks to an ability to undervalued companies and purchase them on the cheap, Buffett has made many people very over the course of his five-decade career.
How it works/Example:
Buffett caught the margin of safety and that sell below their intrinsic value.
Buffett thoroughly researches businesses and only buys them at discounted prices. This practice, which was essentially invented and defined by Graham, gives him a so-called "margin of safety" on all of his . This margin of safety is the difference between a business's intrinsic value and its share price.
Buffett invests in businesses with superior economic characteristics that are controlled by successful, skilled management teams. He also looks for companies with long histories of above-average growth. And unlike many other investors, Buffett does not pay attention to fluctuations, macroeconomics and market predictions. Instead, he merely sticks to his long-term investing plan. As long as a firm's fundamentals do not change, Buffett not sell -- even in times of economic crisis.
Below are a few other characteristics that Buffett looks for when evaluating an opportunity.
One of Warren Buffet's principles is not unlike Peter Lynch's -- stick with what you understand and choose investments with which you are comfortable. Buffett, arguably one of the greatest and most revered stock-pickers of all time, says investors shouldn't complicate things by seeking out complicated companies.
Along those lines, the world's savviest investor has kept Berkshire Hathaway away from fast-growing technology stocks. Buffett admits that he just doesn't understand technology well. As such, he avoids the industry altogether. Before investing in any business, Buffett attempts to predict what the company will look like 10 years in the future. High-tech markets change too fast to look that far ahead with any confidence.
Buffett emphasizes return on equity (ROE), a key measure of a company's profitability. He prefers to invest in companies where he can confidently forecast future ROEs at least 10 years out. He is particularly fond of firms that don't require a of capital, as they tend to produce much higher returns on equity.
Buffett also seeks companies with significant free cash flow. Always mindful of the risks associated with investing, he ensures that his companies have plenty of left over to invest in their growth after they have paid the bills.
In the 1990s, Buffett bought insurers Geico and General Re because he liked how the companies limited and managed their debt.
Buffett also likes the "float" that insurance companies . Policyholders pay premiums up front, but claims are paid out later -- providing insurance companies with a steady stream of low-cost to play with. Until policyholders collect on their policies or claims, the company can invest those billions in stocks/bonds or other areas, and who better to invest that money than Buffett himself?
Among the most noteworthy aspects of Buffett's stock-picking expertise is that he looks for quality companies with quality management teams. When Buffett buys a business, he buys its management as well. Buffett looks for people who are as passionate about their business as he is about investing.
Why it matters:
Commonly referred to as "The Oracle of Omaha" due to his Nebraska roots,is widely regarded as the world's most prominent value investor.