If there is one man that investors look to for investment success, it’s the Oracle of Omaha, Warren Buffett, and with good reason. He not only has had tremendous success over the years for his clients, but Buffett presents his ideas in a way that even more casual investors understand, and most importantly, he rarely strays into areas that he feels are beyond his personal expertise.
A recent research piece from the top-flight analysts at Jefferies presents the investment checklists from nine of today’s top investors. The checklists contain bullet points that they use as a base criteria for buying stocks. They sourced Buffett’s checklist from @martinconder.
We thought it would be good for our 24/7 Wall St. readers to get a look at the 13 point checklist that Buffett uses. Given his decades of investment success, and an incredible track record, these are probably solid rules in any kind of market.
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
- Is management rational with its capital?
- Is management candid with the shareholders?
- Does management resist the “institutional imperative”? In other words, do they avoid groupthink.
- Is the focus return on equity?
- What is the rate on “owner earnings”? Owner earnings is an extrapolated estimate of an owner’s earnings (free cash flow) over a defined period (typically a year).
- Is there a high profit margin?
- Has the company created $1 of market value for every $1 retained?
- Financial analysis: Focus on return on equity, not earnings per share. Free cash flow. High profit margins, and most importantly, how good will the company be in 10 years versus the competition from peers.
- What is the value of the business?
- Can the company be purchased at a significant discount to its value? This is Buffett’s last and most important question. It should be noted that he has done this countless times over the years.
Clearly it is not easy for many investors to find and compare all this data, although some of it can be found for companies that are traded publicly on Yahoo Finance under the statistics and financials tabs.
One way for investors to do less work is to own Buffett’s investment vehicles, which are the publicly traded Berkshire Hathaway Inc. (NYSE: BRK-A) or the lower-voting rights Berkshire Hathaway Inc. (NYSE: BRK-B). Or find the holdings and buy the stocks that help make up the portfolio, though many of the companies in the two classes of shares are not publicly traded.
One thing is for sure: The tried and true ways of a Wall Street legend like Warren Buffett won’t go out of style anytime soon. So keeping this checklist handy will be just as good today as it will be 10 years from now.