Warren Buffett: The Legendary Value Investor
Anyone with the slightest ambition of being a successful investor knows who Warren Buffett is. For those of you who do not know of him, he is the chief executive officer of Berkshire Hathaway, a diversified conglomerate with a remarkable portfolio of investments. He is also known as the ‘Oracle of Ohama’ due to the enormous amount of respect he has amassed in his hometown. Ohama is also a rare place for a massive mogul to be born, bred and based in. Benjamin Graham, his deceased mentor, was instrumental in the formulation of a concept known as value investing, a strategy Warren Buffett has used profusely throughout his career.
Value investing is when you invest in stocks that are trading at an understated value compared to their true underlying fundamentals. The intuition behind such a strategy is that the fundamentals will eventually propel the share price of the equity upwards in the long run and in turn, leaving you with a staggering return on your investment. However, this method requires patience, and most of all, the ability to look at the right fundamentals in order determine the actual value of the company. The most common metric used is the price to earnings ratio which is calculated by dividing the price per share by earnings per share. Earnings per share is calculated by dividing net income by the number of issued shares. The price to earnings ratio of a company is more useful when it is compared with the price to earnings average of the industry in question. A lower price to earnings ratio indicates under-valuation and a higher one, over-valuation.
The problem with looking at price to earnings alone, is that it only considers net income as the only key metric of a company. Warren Buffett does not only look at one metric of course. Cash flow, excess debt; earnings before interest, taxes, depreciation and amortization; corporate governance, competitive advantage and the business model of the company in question are some of the other things he looks at. There are numerous other factors that he would consider as you might expect. After all, he looks for a bargain and this requires teething research and instinct. Stock markets are carried by exuberance and speculation. Buffett has always said that to avoid all the noise, act when others are afraid and run when others are excited. A very simple statement which is extremely difficult to follow. Outside perception promotes impulsive decision making and his ability to remain calm is the reason why he has a $78 billion net worth.
In all honesty, we cannot narrow down Warren Buffett’s success to simply looking at the financial statement extremely well. Theoretical explanations are only half the reason why he has achieved such astronomical returns. We have to realize that he is not an angel or a noble super human. He is only human and it takes a certain degree of ruthlessness and exploitation to get to where he is in the investment industry. Inside information is a highly publicized and criticized financial crime thanks to Hollywood. However, it is very easy to get away with if the right resources, publicity and pool of connections are at one’s disposal- Warren Buffett has all three and more. The financial world is infinitely complex but one globally acceptable view is that the movement of share prices is almost impossible to predict. All we can do is smoothen our speculation with research. To accurately predict share price movements is to understand each and every market player’s motives as well what a company’s results will look like before they are published.
I am also fond of the man so I will temporarily drop my cynical side and explain his success by saying that he has an investor instinct that is simply better than everyone else’s. He has a profound ability to smell danger before anyone else does and he is not hesitant to make a decision so long as he has used his own intuition and methodology. He bought his first stock at age 11 which also makes experience and wisdom plausible reasons as to why he has reached such a high level of wealth. This is a classic case of practice makes perfect. He has invested through all types of recessions from stock market crashes to bond market and asset backed security crashes.
So let us just sit back and continue to learn from the phenomenal Warren Buffett while he is still alive!
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