Direct Share Investing - Warren Buffet Investment Method

by Andrew Newman
in Investing
17 Jun 2010 | 0 Comments

For direct share investing, I use an investment method similar to that used by Warren Buffet.

For the first step, I use a software program that scans the entire market, to find the small number of companies that meet my stringent "Warren Buffett" criteria. The second step is to perform more detailed analysis on the companies that passed through the first scan. The third step is calculating the right price to pay. It's not a question of whether a company is undervalued or overvalued according to some theoretical model but to calculate what return can I expect under my own margin of safety.

So who is Warren Buffet?

He is one of the most successful investors in the world. He is the Chairman and CEO of Berkshire Hathaway, a diversified investment company valued at over US$192 billion (as at June 2010). Before that Buffett ran private investment partnerships.

Suppose someone had the good sense to invest US$10,000 in one of Buffett's original partnerships back in 1956 when they first started. And suppose that when the partnerships terminated in 1969, that person reinvested the proceeds in Berkshire Hathaway. Today that person would be worth over US$280 million - after all taxes and expenses.

To understand the Warren Buffett Investment Method, we need to recognise that he does not think about the stockmarket. "We look at individual businesses," he once said. "And we don't think of stocks as little items that wiggle around in the paper. We think of them as parts of businesses."

One of the best quotes that describes the Warren Buffett Investment Method is the following:

"Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher 5, 10 and 20 years from now."

Suppose we used the Warren Buffet Investment Method to invest in Australian companies between Jan 2001 and Dec 2009. The growth returns* (dividends not included) using this method are shown below as the CMP Portfolio and are compared to the growth returns from the All Ordinaries index.

Chart 1 - Calender Year Returns

Calender Year Returns

Chart 2 - Performance Over 9 Years - Starting With $100,000

Performance Over 9 Years

* Past performance is not indicative of future performance. The future value of investments may rise and fall with changes in the market.

The growth returns above show there is a strong case for using the Warren Buffet Investment Method to invest in Australian companies.

To learn more about direct share investing and Warren Buffet Investment Method for your investment portfolio or self managed super fund, call me on 03 9372 7955.

Important Information

Information provided in this newsletter is general in nature and does not constitute financial advice. While I have taken reasonable care in providing this information, it should not be construed as being specific to your investment objectives, financial situation or particular needs. It's important for you to consider these matters before making any financial decision and I recommend you seek financial advice.

Direct Share Investing - Warren Buffet Investment Method

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