Checklist: Tenets of the Warren Buffett Way
The “Tenets of the Warren Buffett Way” was examined in the book The Warren Buffett Way, written by Robert G. Hagstrom.
The tenets also appear in Hagstrom’s other book The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy.
This book is also one of Charlie Munger’s book recommendations, see here.
Here’s what Robert Hagstrom wrote:
With The Warren Buffett Way, I hoped to describe and codify Warren Buffett’s style of investing, so that others might benefit from understanding his approach. In that earlier book I outlined the fundamental investment tools, or tenets, by which Buffett evaluates possible purchases. These tenets are summarized in Chapter 1, page 8.
The underlying principles haven’t changed much since The Warren Buffett Way was published, in 1994 (“That’s why they call them principles,” Buffett once said), but many readers have asked for clarification about applying the tenets in today’s market.
In summary, the process of focus investing involves these actions:
• Using the tenets of the Warren Buffett Way, choose a few (ten to fifteen) outstanding companies that have achieved above-average returns in the past and that you believe have a high probability of continuing their past strong performance into the future.
• Allocate your investment funds proportionately, placing the biggest bets on the highest-probability events.
• As long as things don’t deteriorate, leave the portfolio largely intact for at least five years (longer is better), and teach yourself to ride through the bumps of price volatility with equanimity.
To learn more about each of the tenets, check out the books mentioned above.
Tenets of the Warren Buffett Way
- Is the business simple and understandable?
- Does the business have a consistent operating history?
- Does the business have favorable long-term prospects?
- Is management rational?
- Is management candid with its shareholders?
- Does management resist the institutional imperative?
- Focus on return on equity, not earnings per share.
- Calculate “owner earnings.”
- Look for companies with high profit margins.
- For every dollar retained, make sure the company has created at least one dollar of market value.
- What is the value of the business?
- Can the business be purchased at a significant discount to its value?
[EDIT] Jae here. I’ve added links to articles where I’ve written on some of the questions mentioned in the checklist above.
- The Investor Trait and How Buffett Would Find, Analyze and Value Stocks
- Fundamental Business Valuation Process
- Tips on Reading into Management Behavior
- How to Properly Interpret ROA and ROE to Measure Management Effectiveness
- What is Owner Earnings?
- How to Value Stocks series
About the Author
The pseudonymous Hurricane Capital was Born in the 80’s, lives in Sweden with a Masters of Science in Business and Economics from Stockholm University. Got interested in value investing and devotes his free time and investing. The main goal through the Hurricane Capital blog is to learn about different investing topics, investors and business cases for investment.