Warren Buffett

Buffett’s early life: He began working at his father's brokerage at the age of 11, and that same year made his first stock purchase, buying Cities Services preferred shares for $38 each. He sold them when the price reached $40, only to see them rocket to $200 a few years later. This taught him the importance of investing in good companies for the long term

Do you know that he ran the partnerships out of his bedroom?

His investment strategy:Buffett employed a three-pronged approach:

1) Generals: undervalued securities that possess margin of safety and meet expected return-to-risk

2) characteristics Arbitrages: company events that are not related to broader market changes, such as mergers and acquisitions, liquidation, etc.

3) Controls: build sizeable holdings, ally with other shareholders or employ proxies to effect changes in companies.

Buffett's philosophy on business investing is a modification of the value investing approach of his mentor Benjamin Graham. Graham bought companies because they were cheap compared to their intrinsic value.

He was of the belief that as long as the market undervalued them relative to their intrinsic value he was making a solid investment. He reasoned that the market will eventually realize it has undervalued the company and will correct its course regardless of what type of business the company was in.

The following are some questions to determine what business to buy, based on the book Buffettology by Mary Buffett:

*Is the company in an industry of good economics, i.e., not an industry competing on price points.

*Does the company have a consumer monopoly or brand name that commands loyalty?

*Can any company with an abundance of resources compete successfully with the company?

*Are the earnings on an upward trend with good and consistent margins?

*Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt in few years from its earnings?

*ROE is consistent over its history and high compared to industry averages?

*Is it more than 12%? Or does the company have high and consistent Return on total capital?

*Does the company retain earnings for growth?

The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.

*Does the company reinvest earnings in good business opportunities?

*Track record of management accomplishing these investments?*Is the company free to adjust prices for inflation?