Lessons from a man who started 28 businesses (most of them successful!)

Hi John,

> Dien, I saw a tv documentary about Warren
> Buffet last week. It was called
> "Woodstock for Millionaires" and I
> wish I'd taped it as I think there was quite
> a bit I missed since I was dealing with
> worms in the PC at the time.
> I think the rules he followed would be much
> the same.
> It helps if you are a sharp as they
> obviously are and not afraid of work.

John, I saw the same documentary! This was a documentary shown on Australian TV, about the Berkshire Hathaway Annual General Meeting. Berkshire Hathaway is the company controlled by Warren Buffett.

It's the biggest AGM in the world, with something like 50,000 people descending on Omaha, Nebraska, to attend, to spend a few hours with their hero, Warren Buffett.

I'm a big Buffett fan myself -- I've been studying his approach to stock investing now for several years, and I apply a similar technique. The essence of his technique is to look for value -- he looks for undervalued growth companies.

Mostly I studied the book "The Warren Buffett Way" by Robert Hagstrom, Jr., and there's also good information in the book "Buffettology" by Mary Buffett and David Clark.

When you look at what he's done, there's NO DOUBT he's a big success. His approach to investing, when you think about it, boils down to solid, common sense.

This probably isn't precisely what Buffett does, but I've essentially boiled down my own Buffett-inspired investing style to the following approach.... Here's how I choose which companies I invest in (and I have an excellent record, but you'll have to take my word for it)....

1. I look for at least 5 years of consecutive growth in earnings-per-share (which is the company profits, divided by the total number of shares).

By the way, this will cut out probably around 99% of listed companies. Most companies don't have 5 years of continuous growth in their profits.... It makes your job much easier once you cut out the other companies....

I didn't invest in any tech stocks (and so I haven't been affected by the market downturn), as most tech stocks don't pass this step. That's because most of them are not making any profits.

2. I like the earnings-per-share (EPS) growth to have some consistency. The reason is, I like to feel I can predict with relative confidence what the earnings-per-share growth would be for the next 5 to 10 years....

So, for example, I prefer it if the company has consistently approximately a 15% growth rate per year in their profits, rather than have profit growth which is jumping around everywhere....

3. After this stage, I use a spreadsheet to calculate what a company is "worth". I use the approach Robert Hagstrom, Jr. uses in the tables in the back of "The Warren Buffett Way" (but which he doesn't really explain very well).

This step enables me to check if the company is "undervalued" or not, based on my estimated growth rates in its EPS.

4. If it passes steps 1, 2, and 3, then I study the company in more detail, to try to really understand what it is they do, and whether they can sustain their profit growth into the foreseeable future.

For example, is there a big enough market for their products for them to grow into? Those kinds of questions....

I think while Buffett may not use this exact technique, he does something similar. It's a nice approach to take, because you end up putting your money with very solid companies which are growing their profits fast....

This is based on the idea that the "worth" of a company is based on the PROFITS it can make for its owners (which means the share-holders), and that in the long term, the stock's price will reflect this worth. When you think about it, this idea seems like "common sense"....

While I haven't yet achieved the riches of Warren Buffett, using an investment-style based on his has helped me to grow my wealth every year, based on the shares I own....

I hope this information helps you to become wealthy. :)

- Dien