Warren Buffett has earned a reputation as one of the preeminent value investors of all time. His Berkshire Hathaway (BRK.B- NYSE) Holding company has stakes in insurance, railroads, publishing, retailing, and manufacturing, among other businesses, and its investment portfolio includes about $53 billion (as of June) of marketable equity securities.
How does Buffett make his picks? What exactly is “Warren’s Way?”
In his rare public remarks and widely followed annual letters to Berkshire shareholders, Buffett makes it sound very simple: he says he buys stocks that are “available at a sensible price.” In fact, Buffett uses very sophisticated screens to determine which companies belong in his portfolio.
Specifically, he uses these five investment criteria:
• Free cash flow (net income after taxes, plus depreciation and amortization, less capital expenditures) of at least $250 million.
• Net profit margin of 15% or more.
• Return on equity of at least 15% for each of the past three years and the most recent quarter.
• A dollar’s worth of retained earnings creating at least a dollar’s worth of shareholder value over the past five years.
• Ample liquidity. Only stocks with a market capitalization of at least $500 million are included.
In the S&P “Warren Buffett” portfolio, they added one more criterion to eliminate overvalued stocks. Overpriced stocks are identified by comparing the five-year discounted cash flow (DCF) estimate with the current price.
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Saverio Manzo
About me: I give Economic, Social and Global trend briefings from some of the world's brightest minds at my blog http://saveriomanzo.com/ and http://saveriomanzo.blogspot.com/. I also provide true and tested financial planning and wealth advice. Most recently, over the past few years, I have become socially conscious and have been attempting to practise ways in which I can live my life more environmentally friendly. Along with some truly exceptional friends, we provide consulting and business development for small-medium sized businesses. In addition, I truly believe in being philanthropic, giving and doing unto other as we would have them do unto us. Some of my fondest resources are from Barry Ritholtz of The Big Picture, David Rosenberg and what Warren Buffett of Berkshire Hathaway is up to behind the scenes, as an example.
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