Warren Buffet, called by many as the “greatest investor alive today” has always been open about the way Berkshire Hathaway invests.  Pouring over his annual reports, I have developed this checklist to help me gain an insight into Warren Buffet’s approach.  Whilst this checklist has not been reviewed or approved by Mr Buffet I am confident that it represents an 80/20 fit to the great man’s philosophy.

 

A Warren Buffet styled “Investment checklist”  
Market tenets  
  1. Is the percentage of total market cap (TMC) relative to the US GNP below 90% which Buffet said was “probably the best single measure of where valuations stand at any given moment”? See graph and table below.
 Yes    No
  1. Is Berkshire Hathaway a net buyer? (a good sign that the market is under-priced.  When Berkshire Hathaway have a cash mountain it is a sure sign of a collapse, as proved in 2020)
 Yes    No
Business tenets  
  1. Do you know how the company’s money is made?
 Yes    No
  1. Does the business have a consistent history of organic revenue growth (growth excluding any acquisitions)?
 Yes    No
  1. Does the company have favourable long-term prospects?
 Yes    No
  1. Is there a big moat around the business (a high threshold of entry e.g., Coca cola)?
 Yes    No
  1. Is it a business that even a dummy could make money in? (Buffet reminds us that in some time in the future a fool maybe running the company.)
 Yes    No
  1. Can current operations be maintained without too much needing to be spent (there is no backlog of manufacturing equipment that needs upgrading)?
 Yes    No
  1. Is the company free to adjust prices to inflation?
 Yes    No
  1. Are any of its main competitors a better target (ensure you read their annual reports)?
 Yes    No
   
Management tenets  
  1. Has the management demonstrated a high degree of integrity, intelligence and energy?
 Yes    No
  1. Is the top management rational (avoiding signs of hubris)?
 Yes    No
  1. Is management candid with shareholders? (evidence in the past of open disclosure to the shareholders when there have been problems)
 Yes    No
  1. Has management the strength not to follow current business and sector fads?
 Yes    No
  1. Are stock options tied to the leadership team’s performance rather than the organisation’s performance?
 Yes    No
  1. Are stock options a small part of remuneration? (if large it is likely that nearly all profits will be given to management)
 Yes    No
   
Financial tenets  
  1. Is the return on equity adequate?
 Yes    No
  1. Is the company conservatively financed with a below industry average debt to equity ratio?
 Yes    No
  1. Are the profit margins better than the industry average?
 Yes    No
  1. Has the company created at least one dollar of market value for every dollar of earnings retained over the last five years?
 Yes    No
   
Value tenets  
  1. Is the value of discounted earnings, using the 10-year bond rate, greater than the current market value?
 Yes    No
22.Has the company been temporarily punished for a specific risk that is not a long-term risk? (the market tends to over punish the share price in such situations)  Yes    No

 

Other points worth investigating if the information is available  
  1. Are rewards shared across the organisation in an equitable manner? If the senior management are driven by large bonuses and share options you can be sure, that over time, integrity will be surely challenged.
 Yes    No
  1. Do all the companies in the group have staff of less than 3000-7000 FTEs? A smaller company has a better chance of being nimble, having a consistent culture and operating with more integrity.
 Yes    No
  1. Is management using modern management methods?  Large antiquated reward structures designed about reaching predefined targets and using annual planning indicate a bunch of dinosaurs are running the company who will not cope with a rapid ‘climate’ change.
 Yes    No
  1. Has the business been free of a major merger in the last three years? (many merger failures come out of the woodwork within this period)
 Yes    No
  1. Is the CEO home grown? Parachuting CEOs from outside is the first sign that there is not a great leadership culture.  Great organisations grow their own CEOs.
 Yes    No
28.Has the business been free of private equity firms for at least ten years (it will take at least ten years to recover from the damage they inflict)?  Yes    No

 

 

Some other pearls of wisdom from Warren Buffett

“The critical investment factor is determining the intrinsic value of a business and paying a fair, or bargain price. “

“Risk can be greatly reduced by concentrating on only a few holdings.”

“Be fearful when others are greedy and greedy only when others are fearful.”

“Unless you can watch your stockholding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

“It is optimism that is the enemy of the rational buyer.”

“It is more important to say “no” to an opportunity, than to say “yes”.”

“Much success can be attributed to inactivity.”

“Wild swings in share prices have more to do with the “lemming- like” behaviour of institutional investors than with the aggregate returns of the company they own.”

“Turnarounds” seldom turn.”

“Do not take yearly results too seriously. Instead, focus on four or five-year averages.”

“Always invest for the long term.”

‘Remember that the stock market is a manic-depressive.”

“Buy a business, don’t rent stocks. Wide diversification is only required when investors do not understand what they are doing.”

 

 

 

 

This is an extract from a book called ‘Don’t say I didn’t tell you’.

The past has great lessons to offer. Whilst technology and the evolving pace of change may lead millennials to thinking that what is ahead of them is unique. In fact, it has all happened before. I am a father in my 60s who has gathered many lessons from the past, and I set them out here for my daughters in the vain hope that they will be a guiding light long after I am physically gone. Some of the suggestions may seem ridiculous at first, but I ask you to chew the crud and make an informed decision later. For a list of topics covered see here.