Warren Buffett. A name to inspire awe among investors. He’s known by many as the Wizard, the Oracle or the Sage of Omaha. Behind the chairman of Microsoft, he’s the world’s second wealthiest person. How big is his wealth? Well, according to Forbes he’s worth seventy four point two billion dollars and he’s pledged to give ninety nine percent of it away to philanthropic causes through his friend Bill Gates’ foundation. This is a man, who through amazing insight and a deep belief in his own investing system,. was worth six hundred and twenty million dollars before his fortieth birthday.
Born in Omaha in nineteen thirty, Buffett developed a head for business at an early age. Whether selling chewing gum, golf balls, stamps, detailing cars, collecting used Coca-Cola bottles or delivering weekly magazines, he was always looking for ways to make money. At eleven, he made his first share purchase. Three shares in an oil refinery. At the tender age of just fourteen, he filed an income tax return complete with a thirty five dollar deduction for use of his bicycle and watch on his paper round. He even spent twelve hundred dollars of his own money buying land at the same age.
By the time Warren had earned his Economics degree at the age of twenty one, he had built up what, in today’s money, was a warchest in cash and assets worth almost a hundred thousand dollars. The question is, how did he turn that into the seventy four point two billion dollars he has in his bulging wallet today?
His real passion was investing and over the next few years, he set up a number of profitable investment partnerships with professionals like doctors, dentists, solicitors and accountants. As his success grew, he bought up interests in and control of newspapers, radio and television stations. He also merged his partnerships together and bought a little-known textile firm called Berkshire Hathaway, transforming it into an investment and insurance company. By the end of the nineteen sixties, Buffett was worth six hundred and twenty million dollars. That’s two billion dollars in today’s money. From the eighties, Warren invested in opportunities from forward dollar trades to Coca Cola. Nearly every investment made a great return. The young man whose shares traded at fourteen dollars eighty six cents back in nineteen sixty five now saw each share worth two hundred thousand dollars.
So, how did he do it? How does his investment mind work and how does he decide which investments could be winners and which to walk away from? Warren’s main inspiration came from one of his lecturers at Columbia Business School. This man was Benjamin Graham, a Londoner who became renowned in economic circles for inventing and refining something called value investing. He someone we’ll be looking at later on in this series.
But value investors ignore the creative accountant and the aggressive lawyer and look coldly at the numbers. Is there a great company whose share price is too low? Has negative market sentiment about a sector depressed the share price of a well-performing business? If you find a company like that and put money into it, you’re value investing, just like Warren Buffett.
A value investor first looks at something called the “book value”, what the assets of a company are valued at in its accounts. If the firm went bust, could all of its assets be sold at market value and raise a sum of money similar to or greater than the book value? If the answer’s yes, you’ve got some security for your investment and you’re off to a good start because you’re getting the rest of the business for free.
But how can we make it more secure? Well, if a company pays out regular and generous dividends, you’ve got a good source of recurring income and a partial return on your investment. Generous dividends typically mean there are good fundamentals in place and the company is on a sure footing in a stable market. That’s more comfort for me as an investor and indicates a healthy outlook over the short to mid-term at least.
The final key to value investing is to look at the price-to-earnings ratio. Companies can be bought and sold for fifteen to twenty times yearly earnings. So if you find a safe, secure, dependable, dividend-paying company that can be bought for only ten times its yearly earnings according to its share price, you could be into Warren Buffett territory.
So the big question is should you copy Warren Buffett’s strategy? With a net worth of some seventy-four billion dollars, he makes for a compelling case. But you don’t learn to trade like Warren Buffet overnight so, unless you’re willing to put in years of study and practice to emulate him, be very careful out there.