Warren Buffett's owner's manual

 

BL :19 JAN 2014

In his letters especially from the earlier years, Buffett had followed the practice of putting out a list of key points that a company needs to satisfy if it wished to get acquired by his investment vehicle Berkshire Hathaway.

The reproduction of those key points will act as a perfect conclusion to our report as it also summarises the key points covered in this report.

However, it should be borne in mind that investing is not a perfect science and hence, mistakes cannot be completely eliminated. A few of them might creep in every now and then.

In fact, even Buffett has acknowledged that he has made quite a few mistakes in his investment career. In a section titled 'Mistakes of the First Twenty-five Years' from the 1989 letter to shareholders, Buffett has reviewed some of the major investment related mistakes that he has made in the twenty-five years preceding 1989. These are the conclusions that he has drawn from them.

Laid out below are the key points that Buffett has mentioned in most of his earlier letters to shareholders. He looks to invest in companies, which have -

1. Demonstrated consistent earning power (future projections are of little interest to him, nor are 'turnaround' situations),

2. Businesses earning good returns on equity while employing little or no debt,

3. Management in place (Buffett says that he can't supply it),

4. Simple businesses (if there is lots of technology, Buffett will not understand it),

5. An offering price (Buffett will not like to waste his time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

Since all the above points are self-explanatory, we do not intend to add anything more except for a small quote from Buffett, which you should go through so many times that it remains forever etched in your memory.

Mr. Buffett once famously said: "Only follow two rules in investing: Rule#1: Do not lose money, and Rule#2: Do not forget Rule no. 1"

If one devotes his investment lifetime to strictly following what we have outlined in this note and also Buffett's rule, he is likely to emerge a much wealthier person than most of his peers.

This article has been authored by Equitymaster, which is known for its well-researched, unbiased and honest opinions on the Indian stock markets.