Sunday, July 13, 2008

10 Basic Buffett questions to ask before investing

In this time of market turmoil, an official bear market, and probable global recession, it is worth turning to someone with a bit of sage advice before one plunks down those hard earned dollars. Warren Buffett has been buying up stakes in large companies of late, the Mars-Wrigley merger and the recently announced funding of a large purchase by Dow Chemical Co. No doubt he has been using some or all of his own techniques.

You and I can too.

The comments by Warren Buffet and analysis by Buffett writers suggest that, at the very least, Warren Buffett looks at the following aspects of a business and its day to day running. These "Buffett criteria" for buying a business, or any investment for that matter, can be put in the form of questions. Questions that any sensible investor should ask before considering a stock investment.

The Basic questions

1. Does the company sell brand name products that are likely to endure?
2. Is the business of the company easily understood?
3. Does the company invest in and operate businesses within its area of expertise or does it have sound management?
4. Does the company have the ability to maintain or increase profitability by raising prices?
5. Is the company, looking at both long-term debt, and the current position, conservatively financed?
6. Does the company show consistently high returns on equity and capital?
7. Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
8. Has the company been buying back its shares, and if so, has it bought them responsibly?
9. Has management wisely used retained earnings to increase the rate of return to shareholders?
10. Is the company going to regularly require large capital sums to ensure continuing profitability?

See case studies.

This should be the first stage of the process. The next, and most important question, is determining the price that an investor such as Warren Buffet would pay for the stock, allowing for the margin of safety, which Buffett often talks about.

Related Links

Everything Warren Buffett

Related Amazon Reading

The Four Filters Invention of Warren Buffett and Charlie Munger
The Four Filters Invention of Warren Buffett and Charlie Munger by Bud Labitan
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c Share Investor 2008