A staunch believer in the value-based investing model, investment guru 澳洲幸运5官方开奖结果体彩网:Warren Buffett has long held the belief that people should only buy stocks in companies that exhibit solid fundamentals, strong 澳洲幸运5官方开奖结果体彩网:earnings power, and the potent🌄ial for continued growth. Although theꦚse seem like simple concepts, detecting them is not always easy. Fortunately, Buffet has developed a list of tenets that help him employ his investment philosophy to maximum effect.

Buffett's Investing Style

Buffett’s tenets fa🦂ll into the following four categori🐻es:

1. Business
2. Management
3. Financial measures
4. Value

This article explores the dif🥀ferent concepts housed within each silo.

Business Tenets

Buffett restricts his investments to businesses he can easily analyze. After all, if a company's operational philosophy is ambiguous, it's difficult to reliably project its performance. For this reason, Buffett did not suffer significant losses during the 澳洲幸运5官方开奖结果体彩网:dot-com bubble burst of the early 2000s d🅰ue to the fact that most technology plays were new and 🍌unproven, causing Buffett to avoid these stocks.

Management Tenets

Buffett's management tenets help him evaluate the track records of a company’s higher-ups, to determine if they've historically reinvested profits back into the company, or if they've redistributed funds to back shareholders in the form of 澳洲幸运5官方开奖结果体彩网:dividends. Buffett favors the latter scenario, which suggests a company is eager to maximize 澳洲幸运5官方开奖结果体彩网:shareholder value, as opposed to greedily pocketing all profits.

Buffett also places high importance on transparency. After all, every company makes mistไakes, but only those that disclose their errors are worthy of a shareholder🦂’s trust.

Lastly, Buffett seeks out companies who make innovative ཧstrategic deci🔯sions, rather than copycatting another company’s tactics.

Tenets in Financial Measures

In the financial measures silo, Buffett focuses on low-levered companies with high profit margins. But above all, he prizes the importance of the 澳洲幸运5官方开奖结果体彩网:economic value added (EVA) calculation, which estimates a company’s profits, af🌸ter the shareholders’ sta🍬ke is removed from the equation. In other words, EVA is the net profit, minus the expenditures involved with raising the initial capital.

On first glance, calculating the EVA metric is complex, because it potentially factors in more than 160 adjustments꧂. But in practice, only a few adjustments are typically made, depending on the individual company and the sector in which it operates.

$\begin{aligned} &\text{Economic Value Added}= NOPAT-(CI \times WACC)\\ &\textbf{where:}\\ &NOPAT = \text{net operating profit after taxes} \\ &CI = \text{capital invested} \\ &WACC=\text{weighted average cost of capital}\\ \end{aligned}$​Economic Value Added=NOPAT−(CI×WACC)where:NOPAT=net🔥&n💟bsp;operating profit after taxesCI=capital investedWACC=weighted average&n🅠bsp;cost of capital​

Buffett's final two financial tenets are theoretically similar to the EVA. First, he studies what he refers to as "owner's earnings." This is essentially the cash flow available to shareholders, technically known as 澳洲幸运5官方开奖结果体彩网:free cash flow-to-equity (FCFE). Buffett defines this metric as net income plus depreciation, minus any 澳洲幸运5官方开奖结果体彩网:capital expenditures (CAPX) and 澳洲幸运5官方开奖结果体彩网:working capital (W/C) costs. The owners' earnings he꧑lp Buffett evaluate a company’s ability to generate cash for s🃏hareholders.

Value Tenets

In this category, Buffett seeks to establish a company's 澳洲幸运5官方开奖结果体彩网:intrinsic value. He accomplishes this by projecting the future owner's earnings, then discounting them back to present-day levels. Furthermore, Buffett generally ignores short-term market moves, focusing instead on long-term returns. But on rare occasions, Buffett will act on short-term fluctuations, if a tantalizing deal presents itself. For example, if a company with strong funda𒁏mentals suddenly drops in price from $50 per share to $40 per share, Buffett might acquire a few extra shares at a discount.

Finally, Buffett famously coined the term "moat," which he describes as "something that gives a company a clear advantage over others and protects it against incursions from the competition."

The Bottom Line

Buffett's tenets provide a foundation on which he rests his value investing philosophy. But applying these tenets can be difficult, given the data that must be cultivated and the metrics that must be calculated. But those who c🌌an successfull꧟y employ these analytical tools can invest like Buffett and watch their portfolios thrive.