Finance Explained

Hello Everyone welcome back to my another blog today I’ll share my views what i learn from the book “The Warren Buffett way” third edition by author“Robert Hagstrom”. The best book for me to learn investing in easier language.

The two rules followed by Warren Buffett which as provided him by value investor and American Economist sir “Benjamin Graham” is Rule no 1: never lose your money and Rule no 2: never forget rule no 1.

The four people who educated Warren Buffett with investing are Ben Graham, Philip Fisher, John Burr Williams and his business partner Charles Munger.

Warren Buffett looks for the company’s that he understand with good long term return, low debt and Honest management operating. It is always important for everyone to understand that buying a stock means buying a business and not for speculation purpose.

“All we want is to be in business that we understand, run by people whom we like, and priced attractively relative to their future prospects“.

Warren Buffett, 1994

In this book there four corners of investment that are described by author from Warren Buffett, the way he invest,
1) Business Tenets
2) Management Tenets
3) Financial Tenets
4) Value Tenets

1) Business Tenets :-
When investing we should have a perspective of business analyst and not market analyst, macro analyst and not even security analyst.

“I want to be in a business so good even a dummy can make money”.

Warren Buffett, 1988

Buffett does not use the advance macro Economic concept or sector trends, rather he only make decisions on how business operates.

The simple and understanding business. Predicting the future is tricky were you have no arena and nothing about it. You should buy stock of the company that you are confident in future earnings for long term of 5-10 years minimum. Buffett also avoids purchasing companies that are fundamentally changing direction because their previous plans were unsuccessful.

He likes stock that are great for long term perspective in high returns. According to Buffett the world economy is divided into small group of franchise and large group of commodity business and the most of it are not worth purchasing. Buffett defines franchise as a company that is needed or desired, has a no close substitute and is not regulated.

2) Management Tenets :-
Is the management rational is the most important for Buffett. When management repurchase stock, Buffett feels that the reward is twofold. If the stock is selling below it’s intrinsic value or undervalued, then purchasing shares makes good business sense.

3) Financial Tenets :-
Buffett does not take yearly growth too seriously. Instead he focuses on 4-5 years average.
– Focus on return on equity and not on EPS.
– Calculate owner earning to get true reflection of value.
– Always focus on the company with high profit margins.
– For every rupee, has the company created at least a rupee of market value.
The earning per share determines the economic value of the business from starting point but not the ending point.

4) Value Tenets:-
Determine the value of business. Buy only when the price is right means when the business is selling at significant discount to its value. Calculate what the business is worth. Estimating the total earnings that will likely occur over the life of business; and then discounting that total backward to today. For earnings Buffett uses owner earnings – net cash flow adjusted for capital expenditure.

Simple stated, a company’s intrinsic value could be found by estimating the earnings of the company and multiplying the earnings by appropriate capitalisation factor. The company stability of earnings assets, dividend policy and financial health influence this capitalisation factor or multipler. To calculate intrinsic value there are many websites available on internet you can go through it.

Thank you so much for reading the blog till here it means alot for me. I hope you’ll also visit my earlier blog on the book summary of Rich Dad Poor Dad by Robert Kiyosaki, were he teaches the personal finance for wealth for everyone.