Warren Buffett, the renowned investor and billionaire, has garnered success through his publicly traded holding company, Berkshire Hathaway. His investing philosophy centers around the idea of the underlying business being the investor’s “margin of protection,” emphasizing the importance of purchasing successful companies at reasonable prices to witness growth in both investment value and the business itself. Buffett’s approach can be understood through his writings and explanations in the Berkshire Hathaway annual reports, as detailed in the book “Buffettology.”
Based on Buffett’s strategy, the American Association of Individual Investors (AAII) developed a stock screen focusing on strong historical growth in earnings per share. The Buffettology EPS Growth screen has outperformed the S&P 500 index since its inception in 1998, with a year-to-date return of 6.2% compared to 2.4% for the S&P 500, showcasing the effectiveness of Buffett’s investing principles.
Buffett believes that a successful stock investment stems from the underlying business’s ability to generate increasing earnings each year. He categorizes businesses into commodity-based firms, which he typically avoids, and consumer monopolies, which he finds more favorable due to their unique products and services that set them apart from competitors.
To identify consumer monopolies, investors can evaluate factors such as profit margins, brand loyalty, and earnings trends, all of which contribute to the company’s attractiveness as a potential investment. Buffett also considers conservative financing, strong earnings growth, consistent reinvestment in the business, and above-average return on equity as key indicators of a promising company.
Buffett’s focus on buying excellent businesses at attractive prices highlights the importance of valuation in stock investing. By projecting annual compound rates of return based on historical earnings growth, Buffett aims for a return of at least 15%, a strategy that has led to the identification of stocks passing the Buffettology EPS Growth screen with promising estimated returns.
In conclusion, Buffett’s investment approach emphasizes the identification of excellent businesses with strong growth prospects and effective management practices, aligning with the discipline of waiting for the right market conditions to purchase these businesses at favorable prices. While the stocks meeting the criteria do not serve as specific recommendations, the approach provides a framework for investors to consider when evaluating potential investment opportunities in the market.
