Warren Buffett Simplified is a vastly reduced, easier-to-understand, version of the guru's principles.
A version where the ordinary 'Man-in-the-Street' can understand how to invest, like the great man himself, but with far, far less complications.
Warren Buffett is a financial genius. He has been since childhood. And when he went to College he was mentored by the best investment minds of the day.
At the time of writing - his vast fortune stands at something like $90 Billion. Success, by anybody's standards.
But to get to that figure, he had to set for himself - hard and fast rules. And stick to them.
This web page is an attempt to define his investment criteria and to simplify it for the common man. That'll be you and I.
I've named this article - Warren Buffett Simplified.
Warren Buffett was born in 1930 and was the son of a Republican Congressman.
Ever since he was a boy, the young Warren Buffett was fascinated by numbers.
He showed entrepreneurial traits from a very early age and it was no surprise at all that he ultimately ended up at University studying finance.
In 1949 he studied under the very influential Benjamin Graham who was known as the "Father of Value Investing".
The young Warren agreed and disagreed with his mentor on many things.
And, at the age of 26, Buffett started his own company. His one belief was investing in companies based on value and buying those stocks at the largest possible discount to their true value. He likes to call it: "buying a dollar for 50 cents."
Many of his followers invested $10,000 in his original partnership in 1956 and when Buffett saw an over-priced market in 1969 and dissolved the company - those $10K investments had grown to $300,000
A whopping 29.5% compound increase over 13 years.
Warren wanted out of what he saw as an overheated market in 1969. Stocks were selling at "crazy" high Price to Earnings. It proved to be perfect timing. A Bear Market lasting from 1970-1974 ensued.
Small wonder a lot of those investors stayed with Buffett when he set up Berkshire Hathaway. Warren bought stock (lots of it) after that brutal market decline with Price to Earnings on offer - as low as 2.
The original $10,000 that his followers invested, would have grown to well in excess of $30 Million and many of them did stick with Buffett and went on to become multi-millionaires.
During his early development, Warren was introduced to a guy called Walter Schloss. Walter Schloss had the young Warren poring over company accounts. So much so, that by the time he had finished (5 years later), there wasn't much that Warren didn't know about company accounts.
Hence another one of Buffett's traits - his attention to detail.
It was then around this time that he teamed up with his present partner Charlie Munger. Between them they built Berkshire Hathaway into the multi-billion dollar company that it is today. The 'A' shares are currently trading over $350,000 per share. Unbelievable!
Every good investor should trade within a set of rules. Most investors prefer to define their own rules. But most will model other, successful traders, that have already 'blazed a trail'
Warren Buffett simplified is no exception.
Put simply - Warren Buffett looks for 'Consumer Monopolies' (see below) with a low Price to Earnings ratio, consistent earnings increases, large discount to Book Value, low debt, and strong balance sheet.
The above are just a few of Warren Buffett's rules.
Here's a more comprehensive list (but by no means exhaustive):
1. He likes to invest for the long-term (no gambling - it is time in the market and not timing the market that will grow your portfolio)
2. He only considers large-cap companies (not interested in tiddlers and 'penny' shares)
3. He has defined two type of company: one group he calls 'sick' companies. The other he refers to as: 'healthy' companies
4. He ONLY invests in 'healthy' companies. He names these: 'consumer monopolies'. He names 'sick' companies as: 'commodity' type businesses
5. He researches to find companies with low P/E ratios, i.e. low relative to the market as a whole, and low relative to their market sector average
6. He likes to see an increase, year on year, in earnings over a 5 year (preferably 10 year) period. Those are historic earnings, he also likes to look at future (i.e. prospective) earnings
7. He likes to see companies with increased turnover each year
8. He likes to see companies with increased profit each year
9. He likes to see companies with increased equity each year
10. He likes to see companies with low debt i.e. re-payable in 5 years max.
11. He is prepared to be patient. His research has already told him what a share is worth and he waits to buy at the right price i.e. well below 'book value'. Herein lies his #1 quality - he is patient
Those rules are (very) roughly, the rules of Warren Buffett simplified.
To even try and copy what the man himself actually does, would be virtually impossible for us amateur investors to model.
So don't even try.
But you can follow the rules laid out above. Admittedly, your detailed research will never be as thorough as what Warren does, but your approach will be generally the same.
Again, he probably goes into detail, but his definition should be good enough in order to tell the difference between a 'Commodity' type business and a 'Consumer Monopoly' type business.
Whereas, the companies he refers to as 'sick' is because they are in very competitive industries that sell commodity type products or services. Warren Buffett simplified this by stating that all their competitors are trying to beat each other on price.
Conversely, his 'healthy' type of company, usually sell brandable products or services, and have no competition - in other words - a monopoly.
'Sick' companies are easy to identify. Their profits and/or earnings over the years are usually 'hit and miss'. Sure, they make profits. But only in good times. A little research on their accounts would generally show up periodic losses, or some other inconsistencies.
And nearly always, they would be carrying huge debt. Debt that would be payable over 20 years, for example.
Furthermore, because of the type of industry they are in, they generally have to replace machinery quite often. And it's usually very expensive machinery at that. Hence the huge debts.
'Healthy' companies on the other hand, usually have brand loyalty. They sell products and services that people have just gotta have. Products/services that they can't live without.
They do not have to replace machinery often. Their machinery does not wear out as often. Their industry is light compared to the heavy industries of the 'sick' companies.
Below is an example of the turnover, equity, and earnings of a 'sick' company:
You can see immediately with this type of business, turnover, earnings, and shareholder funds (equity) are erratic.
Turnover is as much as, or even bigger than that of the 'healthy' company shown below. Yet earnings are a fraction by comparison.
These figures are fictitious and do not represent any actual company but they are shown here to emphasise what to typically look out for.
Of course, our hero - Warren Buffett - does much, much more research than this.
Profits would have been another parameter to list as would total debt. But liabilities are hidden in the equity column being the sum total of assets minus liabilities
Below is an example of the turnover, equity, and earnings of a 'healthy' company:
You can clearly see that 'healthy' companies show rising figures for almost all, if not all, parameters. From your initial research your final watchlist will show only a handful of companies that meet ALL of your criteria.
If that happens to reveal NO companies, then you will have to lower your criteria slightly.
Having said that, I have never not been able to find 'healthy' companies that meet my exacting criteria. They are out there. Find them and then wait to buy them at the right price.
Do that consistently, and your pension pot will take off - aided and abetted, by Einstein's Eighth Wonder of the World.
Let's get the 'sick' dealt with first. Examples of these type of businesses are:
And examples of 'healthy' industires are:
When you think about it, the whole concept is logical. And to be fair, Warren Buffett was not the first to spot this. That was a guy called Bloomberg back in the 1920s who gets the credit.
If Warren Buffett simply chose Consumer Monoploy type businesses with a low P/E ratio he would have a long list.
Companies with low P/E ratios is but one of his criteria for choosing a company.
He has gone on record saying that over a lifetime, you need only consider between 20 and 30 companies.
Wow. That certainly filters the numbers down.
Even using the crudity of his criteria in simplified form, it would be difficult not to find, over a lifetime, dozens of companies that fit 'the model'.
So Warren Buffett must have some secret method for selecting shares - a method that the rest of us will never know. We have to use our 'best estimate.'
Over the years, it has generally served me well.
It is, generally: follow the rules laid out earlier.
The really big money is made by first identifying the company you wish to invest in, and then waiting for the opportune time to buy. These would present themselves when markets have a 'correction.'
Warren Buffett refers to these opportunities as 'market short-sightedness.'
One of his famous quotes comes to mind:
"Be fearful when everyone else is greedy, and be greedy when everyone else is fearful."
Here's a scenario that I might action.
I will have a copy of the 11 rules given above printed out, and at the side of me - or pinned to my office wall.
Then I will print out a list of all the companies on my watchlist. This is simply a list of all companies that I have listed that comply with rules 2 to 5.
I will then research each of those companies, deleting the ones that do not comply with rules 6-10.
From experience, I can tell you that the list gets whittled down considerably. Then I will wait in accordance with rule #11.
It all sounds easy. But that, in a nutshell, is Warren Buffet simplified. Of course, the great man himself will do a heck of a lot more research - weeks and weeks of it - but I don't have the know-how, or the inclination, to do what he does.
The above scenario has served me well up until now. I'm sure you can see that there will not be many companies that 'fit the bill.' They are there - but finding them is only half the problem. Buying them at the right price is the other half.
Warren Buffett will not over-pay for his investments. What he is looking for is some kind of correction in either the individual share, or the market as a whole.
He thinks that markets over-do things both at the top of a market and at the bottom.
To give you a few examples. Around February/March 2020, the Covid pandemic hit the world hard. Stock markets around the world nose-dived. But markets tend to look ahead.
Markets recovered and are still well above their lows during the initial panic. Was the market sell-off overdone? Maybe. But investors, like our hero Warren, gobbled up all the stock they could afford. In Buffett's case, this would have been Billions of dollars worth.
A classic case of buying at the right price. Or as Warren puts it - buying a dollar for 50 cents.
Now us mere minnows can't possibly emulate what Warren does but we can model him. Be patient. Wait for company shares to be oversold and step in.
Because you will have done your due diligence, you know that the company you have invested in will continue for the foreseeable future to increase earnings year-on-year, you will remain invested in the shares for a long time. Years. Possibly decades.
Remember - it's time in the markets not timing the markets that is important.
Take for example Telecom Plus.
A terrific company and very well managed.
The graph to the left shows earnings steadily increasing over the years from 2016 to 2020. I don't have figures for the years before that but I'm certain they would be in line and consistent.
It is also reasonable to assume that earnings for future years (prospective earnings) would also steadily increase in line with those already seen.
What this means is that for a given P/E to remain constant, an increase in earnings would result in the share price increasing in order to maintain that value of P/E.
All things being equal, the share price would rise. Were earnings to increase year on year (which is more than likely for 'healthy' companies) then it would be safe to say that the share price would increase - which is what you desire.
Telecom Plus, at the time of writing this, was trading on a P/E in the mid 20s. Way too high. I would not think of buying them on such a rating. However, any major pull back in the share price could very well tempt me.
The shares have dipped below 1000p (907p) not that long ago and may do so again.
If so, I will be ready. Coffers at the ready.
Of course, it would be extremely convenient if the shares were at the "right price" now and I could snatch them up for what I would consider - a bargain price. But the markets are not that kind to us. But they do reward patience. And patient is what I will be.
Telecom Plus is not the only company that I will have my eye on - I will have a watchlst with a dozen or so companies to keep me busy.
However, in reality, it does not take me long to monitor all the shares on my watchlist. About 15 minutes tops - to keep tabs on all of them. Just proving that anybody can do this.
Which means anybody can realise double digit growth in their pension pots.
Warren Buffett simplified a lot for the rest of us. He has made investing a game for the common man. In this 21st. century that we belong to, the world of investing, thanks to the availability of the internet, is within reach of all.
Warren Buffett, as genius as he is, has generously passed down a lot of his findings. As we should be grateful that he has.
We all have lives to live. We are not number crunchers. We want to invest, and are willing to follow common sense. And Warren Buffett has handed down plenty common sense ideas on investing.
His philosophy - buy a dollar for fifty cents and hold for the long term, is sound advice.
He's made a tidy living out of it - the rest of us would be happy with a fraction of a fraction of what he has.
Within our pension pots, it's tempting to want to speculate on that 'hot tip' on some little-known minnow, and go for a 'ten bagger.' Don't do it. It will rarely be successful. Follow the tried and tested route - invest for the long term.
After all - who would you rather follow - The Sage of Omaha or your mate giving you a 'red hot cert' down the pub?
Saving for your pension and investing for the long term make excellent bed mates.
Disclaimer: Any individual shares discussed on this website are NOT recommendations. They may, however, be the actual portfolio of the writer.
This website is not authorised to give financial advice of any kind.
Chris and Clem Meet Up - hopefully, the last time before lockdown easing
Chris and Clem Meet Up - at last! They can meet in the beer garden
Chris and Clem Meet Up and it is Chris' turn to do most of the talking. Chris' little windfall has allowed him to widen his portfolio. Chris vows of more.