Warren Buffet's 4 Step Stock Exchange Strategy

[Ankesh]

I don't remember the source anymore - but I'd saved it in my swipe file.

How Warren Buffet evaluates stocks:

Filter #1 – Can we understand the business? What will it look like in 10-20 years? Take Intel vs. chewing gum or toilet paper. We invest within our circle of competence. Jacob’s Pharmacy created Coke in 1886. Coke has increased per capita consumption every year it has been in existence. It’s because there is no taste memory with soda. You don’t get sick of it. It’s just as good the 5th time of the day as it was the 1st time of the day.

Filter #2 – Does the business have a durable competitive advantage? This is why I won’t buy into a hula-hoop, pet rock, or a Rubik’s cube company. I will buy soft drinks and chewing gum. This is why I bought Gillette and Coke.

Filter #3 – Does it have management I can trust?

Filter #4 – Does the price make sense?

My take:

Invert the filters. First see if the price makes sense. Then see if the management is good. Then see if the biz has a durable competitive advantage. And then see if you can understand how the biz works.

How to know if the price makes sense or not?

If you just evaluate a few key factors, you'll get a good feel for the stock.

1. high roa (over 25%)
2. low p/e
3. high dividends history
4. increase in recent trading volume
5. positive increase in price range