What is it about Warren Buffett that makes him such a fantastic investor?
How come Warren Buffett is such a fantastic investor?
The early years
To answer that question we first need to look into what Warren Buffett has actually done.
He studied at Columbia University under the legendary Benjamin Graham where he learned the fundamentals of value investing.
What a value investor does is that he or she is looking for securities which prices are below its intrinsic worth.
What matters is the price. Buffett knows that if he can buy a well-run company for pennies on the dollar, sooner or later the market will appreciate its error and see the price of the security rise.
That is value investing and that was exactly what he did in the early days of his investing career.
For instance he bought a 5% stake in in American Express in the mid-1960’s for $13 million dollars.
What metrics are Warren Buffett looking at?
There are of course a few metrics that he looks at when investing in a company:
- Free cash flow is the cash that the company is able to generate after paying off its bills for its assets. This is for example the cash that can be used for dividends.
- Return on equity is another important Buffett-metric. A high Return on equity often goes along with a high annual growth rate in earnings per share.
- Debt to equity is where you take the Total liabilities of the company and divide with Shareholders’ equity. This metric informs you if the company has high debt levels or if they are low risk and manageable.
- Net earnings to sales is where you calculate the profit figure per dollar of sales. For a manufacturing company this number is usually an indication of relative weakness and strength.
Good luck with your investments. If you want to look at value metrics of small-cap stocks you can look here.