ON WARREN BUFFETT’S INVESTMENT TENETS

AS THE GHANA STOCK EXCHANGE  (GSE) CONTINUED ITS WAY DOWNWARD, I’LL START MY OVERVIEW NOW HOW TO BUY STOCKS THE WAY WARREN BUFFETT DOES. FIRST OF ALL, AND THAT IS A GENERAL PRINCIPLE, BUY STOCKS IN THE WAY YOU WOULD BUY YOUR OWN BUSINESS.. FURTHERMORE, FOLLOW THE PRINCIPLES (TENETS) LISTED BELOW AND IN FUTURE ARTICLES. THERE ARE FOUR GROUPS OF TENETS: BUSINESS, MANAGEMENT, FINANCIAL, AND VALUE. I WILL  START WITH THE PRINCIPLES (TENETS) CONCERNING THE BUSINESS.

  • YOU SHOULD ONLY BUY A BUSINESS THAT IS SIMPLE AND UNDERSTANDABLE

FOR SEVERAL YEARS, WARREN BUFFETT REFUSED TO BUY INTERNET STOCKS LIKE FACEBOOK AND GOOGLE. ALSO RELATED STOCKS LIKE APPLE WERE NOT ON HIS LIST. THE REASON FOR HIS NON-COMMITMENT TO THESE STOCKS WAS, AS HE SAID, THAT HE DIDN’T UNDERSTAND ANYTHING ABOUT THESE STOCKS. THAT CHANGED IN THE LAST YEARS, AS HE BOUGHT SHARES IN GOOGLE. THIS MIGHT BE BECAUSE HE MORE AND MORE PASSED DECISION-MAKING OVER TO PEOPLE HE TRUSTS. THOSE PEOPLE MIGHT UNDERSTAND MORE ABOUT THE SO-CALLED FAANG STOCKS (FACEBOOK, APPLE, AMAZON, , NETFLIX, GOOGLE) THAN HE DOES.

BUT THE PRINCIPLE STILL STANDS, YOU SHOULD ONLY BUY STOCKS IN COMPANIES YOU UNDERSTAND. THIS UNDERSTANDING INCLUDES THE BUSINESS MODEL AS WELL AS THE ENVIRONMENT IT OPERATES. AT THE LONG RUN, THE SUCCESS OF YOUR INVESTMENT DEPENDS ON THE SUCCESS OF THE COMPANY IN THE FUTURE. TO ACHIEVE YOUR SUCCESS, YOU MUST ANALYSE THE BUSINESS VERY WELL. AND TO ANALYSE THE BUSINESS VERY WELL, YOU MUST UNDERSTAND IT. SO EASY IT IS…

  • HOW DID THE BUSINESS PERFORM (OPERATE) IN THE PAST?

IT IS ALWAYS DIFFICULT, IF NOT IMPOSSIBLE, TO PREDICT THE FUTURE PERFORMANCE OF A COMPANY. BUT AT LEAST, THE PAST PERFORMANCE WILL GIVE YOU A HINT FOR THE FUTURE. OF COURSE, IT DOESN’T HELP JUST TO LOOK AT THE LAST ANNUAL REPORT. THE FACT THAT THESE NUMBERS MIGHT BE POSITIVE SURELY DOESN’T SAY ANYTHING ABOUT THE FUTURE. YOU SHOULD BE ABLE TO DEVELOP A SUSTAINABLE TREND  IN THE PERFORMANCE OF THE COMPANY.OF MUCH IMPORTANCE IS – OF COURSE, BUT NOT ONLY – A THOROUGH ANALYSIS OF THE FIGUES PRESENTED IN THE LAST TEN YEARS.

BUT YOU SHOULD ALSO LOOK – AS I SAID BEFORE – AT THE ENVIRONMENT IT OPERATES. IT MIGHT BE THAT ECONOMICAL OR POLITICAL EVENTS IN THE PAST INFLUENCED THE COMPANY’S RESULTS POSITIVELY OR NEGATIVELY.THESE EVENTS MUST BE TAKEN INTO CONSIDERATION WHEN JUDGING THE COMPANY’S PERFORMANCE. THAT’S WHY IT IS IMPORTANT TOUNDERSTAND THE BUSINESS, AS I MENTIONED UNDER POINT 1).

  • WILL THE BUSINESS – GIVEN A THOROUGH ANALYSIS – HAVE A POSITIVE DEVELOPMENT IN FUTURE?

AS I SAID BEFORE, IT IS VERY DIFFICULT TO FORESEE THE FUTURE PERFORMANCE OF A BUSINESS. BUT IF YOU LOOK AT THE FINANCIAL STATEMENTS (BALANCE SHEET, PROFIT/LOSS STATEMENT, CASH FLOW STATEMENT, ETC.) INTENSIVELY, YOU WILL SURELY COME TO A CONCLUSION. YOU MUST, OF COURSE, PUT THE FIGURES INTO A RIGHT PERSPECTIVE.THERE ARE CERTAIN RATIOS WHICH WILL GIVW YOU THE RIGHT PERSPECTIVE. THESE ARE, FOR EXAMPLE:

  1. PRICE/EARNINGS RATIO (THE RELATION BETWEEN THE PIECE OF A SHARE AND THE EARNINGS PER SHARE);
  2. DEBT RATIOS (HOW THE COMPANY WILL BE ABLE TO DEAL WITH ITS DEBTS);

OF COURSE, THIS LIST IS NOT COMPLETE. FURTHER RATIOS AND WAYS TO FIND OUT WHETHER A COMPANY IS SECURE TO BUY, YOU’LL FIND IN GRAHAM’S “SECURITY ANALYSIS”. YOU CAN DOWNLOAD THIS BOOK ON TOP OF THIS ARTICLE.

NEXT WEEK, I’LL DISCUSS BUFFETT’S MANAGEMENT TENETS. STAY TUNED!

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