Warren Buffett

Actually for Warren Buffett strategy is a complicated to understand I seriously need some comments to show that I'm correct for each of his strategy

The first strategy is patient Investor Strategy, buy with great care and hold for a very very long long time

1. Large purchases (at least $75 million of pretax earning unless the business will fit into one of our existing
     units)
2. Demonstrated consistent earning power
3. Business earning good ROE and little debts employed and is better if the business don't have any debt
4. Management in place
5. Simple business (easy to understand)
6. An offering price which is known by, easily obtained.

This is a classic strategy of his.He want to invest in companies that have sold, reliable, conservatively financed businesses involving simple products and services.

Two other qualities he looks for in a companies is by having an enduring moat and a durable competitive advantage. Enduring moat means that it almost impossible for a competitor to overtake the company that you invest. Example of a company he invest is Coca-Cola.

Mary Buffett specifically lists a few broad categories of businesses that tend to get Warren's attention:

1. Business that makes products that wear out fast or are used up quickly, or makes products that
    merchants have to carry or use to stay in business, example toothpaste and carry by most of the
    shopping mall and convenient store.

2. Communication businesses that provide a repetitive service that manufacturers must use to persuade the
    public to buy their products.

3. Business that provides repetitive consumer services that people and businesses are consistently in need
    of.  For example, credit card and tax preparation services.

4. A business product has not changed much over time nor is expected to change much in the foreseeable
    future as to being able to predict the future earnings.

5. Companies that don't spend a lot of capital expenditure.
Other than these, strong management is very important too.

Now these are Buffett Strategy which has relative low risk, forever time to investigate a right company to invest and really really high effort.

First stage of analysis

a)1) Look at the nature of the company's business. (Strong brand Recognition)
   2) Look to see if company has the ability to pass on costs or manage the costs. (Costs increase cause by
        inflation and whether the company able to manage the cost by passing the cost)
   3) Look at the complexity of the product the easier the better.

b)Earnings Predictability, earning from year to year must be continually increased. (Based on Buffett, he
   focused everything on 10 years basis)

c)Level of debt must be lower than 2 times earnings.

d)ROE more than 15%

e)Return on total Capital Return must be more than 12%.

f)Companies will free cash flow will be better

g)Use of Retained Earnings, utilization of RE more than 15% by taking the difference between last
   year's fiscal earnings and earnings for the fiscal year ten years ago, and divides that figure by the total
   amount of RE over the same period. Provides the rate of return.

I think this is the example that how he examined this, and this is picked from this website

http://www.buffettsecrets.com/retained-earnings.htm

Take for example, Canon Inc. Using figures available from Value Line, we can calculate that, in the period from 1993 to 2002, Alcoa earned a total of $9.56 per share. It paid a total of $ 1.55 to shareholders by way of dividends. This means it retained profits over that period amounting to $8.01.

In that period, earnings per share grew from .24 to 1.79. That is, all the profits retained by the company ($8.01 per share) resulted in the earnings per share rising 1.55 (1.79-.24). To show the return percentage, the calculation is

1.55 x 100 = 19.35
          8.01

A return of 19.35% would be acceptable to most investors but, in the end, shareholders would have to consider whether, had they received all the profits by way of dividends, they could have put the money to better use.

Came to second stage of the analysis which about whether a company has an attractively priced or not.

a) The initial rate of return which is the EPS/Price per share and it must be more than long-tern treasury
     bond yield.

b) The Return on Equity Method which is the most complicated part of his that I wanna learn

    Step 1: Find the percent average ROE After Payout=Average ROE * (1-(Average payout 
                 percent)
    Step 2: Project the Equity in 10 years
                which by using the formula: FV = PV*(1+i)^n whereby the i percent average ROE After     
                Payout, PV is current equity per share, n is 10
    Step 3: Convert the Future Equity into a Future EPS
                Future EPS (in 10 years) = future equity/share (in 10 years) * 10-year average ROE
    Step 4: Calculate the Future Stock price
                Future Stock Price (in 10 years) = EPS (in 10 years) X historic P/E ratio (or current P/E ratio, if
                lower)
   Step 5: Calculate the Future Dividends and Add to the Future Stock Price to Get the Future Stock Price
               With Dividends
                Future Stock Price (with Dividends) = future stock price + total dividend payouts (10 years)
   Step 6: Calculate your Expected Rate of Return Based on the Average ROE Method.
               FV = PV * (1+i)^n
               PV = Current Stock Price
               FV=Future Stock Price + dividend pool
               n= number of years (10)                 Expected return is good when pass 15%


c) The EPS Growth Method
    Step 1: Calculate the expected future stock price (with dividends) based on average EPS growth method
     EPS in 10 years = (1+EPS growth rate)^10 * current year EPS
     Future Stock Price (in 10 years) = EPS in 10 years * 10 year average P/E (or current P/E if lower)
     Future Stock Price (with Dividends) = future stock price + total dividend payouts (10 years)
     Step 2: Calculate your expected rate of return based on the average EPS growth method
     FV=PV*(1+i)^n
     PV = Current stock price
     FV = Future stock price with total dividend pool
     n = 10 (number of years)                           Expected Return more than 15% is good

d) Average Final return = (Expected Return on Equity Method + ExpectedEPS Growth Method)/2

More than 15% is good

All the sharing is pick from this book:
John P. Reese with Jack M. Forehand,CFA,2009,The Guru Investor, How to Beat The Market Using History Best Investment Strategies,Hoboken,New Jersey,John Wiley & Sons.Inc