Financial Tips - Investment Warren Buffett Style

"I'm a big believer in betting on what you know about instead of some unknown." -Warren Buffett

For those who aren't familiar with the name Warren Buffett, think money, and lots of it. Warren Buffett is an Investor's icon with a magnificent ability to select companies that will yield great profit year after year. His track record as a billionaire is laid out in decades of history and his legacy of not only investment success but also philanthropy will live on long after his charmed investment on Earth is up.

Warren Buffett first and foremost is a long-term investor meaning he doesn't buy for a quick buck but rather long-term returns. To quote Buffett, he has "an entrance strategy and not an exit strategy" (www.charlierose.com) After researching Buffett's nature and investing style, several key factors emerge quite consistently in his talk of investing. Those things are the following general rules:

-Risk Management through consistent, dedicated and stable investing
-A well selected management team that meets Buffet's criteria for management and leadership
-Buy Cheap through value investing
-Forgo companies that present consistent long-term losses
-Seek out competitive companies with strong market share
-Research a company inside and out i.e. business models, competitive positioning, know how etc.

In terms of Berkshire-Hathaway, Buffett has one major rule, play big. The reason being for big investments is the size of Berkshire-Hathaway, the company Warren Buffett grew and invests for. That is to say, since the company is so large, to actually grow the earnings of the company takes massive investment in massive companies. Otherwise would prove difficult due the volume of smaller companies required for Buffett's review. It would seem, Buffett not only invests money wisely, but also his time.

Buffett does more than just magically pick companies although it may appear as though that is what he does. As easy as he makes it look Warren Buffett does utilize some key financial principles according to Harry Domash of MSN Money. These financial principles are paraphrased below:

-Capacity to produce strong future earnings growth
-High self sustaining income growth that significantly outweighs financial leveraging from debt
-For companies with high Equity debt, Return on Capital Invested should also be high
-Pre-tax profit margin must be significantly higher than the industry average
-Corporate debt considerably lower than the industry average
-Price/Cash flow ratio lower than the industry average
-Higher than average industry income per employee i.e. well payed employees

Domash's analysis of Buffett's requirements are quite a tall order financially, especially as alluded to in his high percentages for the above factors. Nevertheless, if followed, these financial fundamentals do seem like admirable investment principles that have the potential to rule out a good number of companies. There are also some tell tale signs of what both Warren Buffett and analysts who attempt to emulate Buffett indicate. Essentially these things can be boiled down to a few essential investment ingredients including companies that are very competitive, financially sound, have sustainable growth, invest in their people and have competent management.

In regard to International investing, Warren Buffett does consider economic conditions and international markets in his investment style. According to his statements on a May 2007 television interview with Charlie Rose, Buffett has increased Berkshire-Hathaway's holdings of International companies. While the majority of ownership rests with Domestic U.S. companies, Buffett naturally recognizes opportunities for significant growth of these companies. These companies may also present a minor hedge against localized sector downturns in the Berkshire-Hathaway portfolio. Despite 'knowing' how Warren Buffett invests, apparently no one does it quite like him as there just aren't that many billionaires around. Perhaps this itself is suggestive of yet another investment ingredient. From what many know of Buffett, that special ingredient quite possibly is what some might call investment character.

To better understand this investment character, it might be reasonable to consider Buffett's decision to invest an overwhelming share of his personal estate to Philanthropy. Not only is this a huge amount of money (around 30 Billion), how and why Buffett did this is telling of Buffett's character. The decision to invest in charity seems to suggest a belief not only in high quality, but humanity, and yet again in good management as the Bill and Melinda Gates foundation is the largest selected recipient of these funds.

Sources:

http://www.streetauthority.com/warren_buffett.asp
http://moneycentral.msn.com/content/Investing/Findhotstocks/P90537.asp
http://www.charlierose.com/shows/2007/05/10/1/an-exclusive-conversation-with-warren-buffett
http://www.fool.com/investing/etf/2007/05/18/what-warren-buffett-thinks-about-etfs.aspx
http://en.wikipedia.org/wiki/Warren_Buffett