“To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses – How to Value a Business, and How to Think About Market Prices.”
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards – so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.” (1996 Chairman’s Letter–Warren Buffett
Many weeks ago I mentioned and posted a book on using clean (taking out the “dirty” stuff like one-time accruals) surplus accountinghttp://wp.me/p1PgpH-Fx
The gist of the method is to use clean surplus accounting to calculate the company’s true return on equity that makes it easily comparable to other companies. Then invest (at the right price) in companies with better than average ROEs than the market’s average ROE (13%) if you want to outperform an index of stocks.
Obviously, if a company sports a relatively consistent ROE above 15% without too much debt, then the company probably operates with competitive advantages.
For those who wish to learn more: You can listen to radio segments http://www.buffettandbeyond.com/radio.html of the promoter of “Buffett and Beyond.” Yes, a bit promotional, but the concept the Professor is explaining is sound.
For a list of companies that fit the investment parameters go here: Parameters_for_Investing_the_Buffett_and_Beyond_way
A consolidation of past articles: Clean surplus article
If you have a method that makes sense, you know how it works, and you have confidence in its LONG RUN performance, then you are better off than 99.9% of all investors in the market.
I am not promoting the above method as THE best way to invest, just suggesting that you develop your own investment philosophy and method that YOU believe in. This post is just an example of how you might go about developing your method.
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