Decoding Warren Buffett’s Economic World-View

He's not just a myth

May business people quote Warren Buffett in their day to day operations.

It's easy to become a little skeptical and start thinking of him as more of a fairy tale than a real investor.

But it's not solely hype.

His company, Berkshire Hathaway, grew exponentially faster than the stock market during the same time period.

Berkshire owns so many companies outright that one can write many articles on that topic alone, and have been.

Some of those corporations could have been in the top tier all on their own.

The master behind the mastermind

He attributes most of his philosophy on investment to Benjamin Graham.

Many people are unaware that Graham lost money in the Depression. That might help you date him better. Talk about a reason to be more financially conservative.

He not only rebounded but also went on to influence national policy.

His efforts helped pushed through a law requiring more honest financial statements by corporations.

Graham then used those more accurate numbers to dominate Wall Street. 

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The things Buffett looks for

There is an exhaustive list of criteria that the new Zen master is purported to employ.

Still, they can be broadly categorized under a handful of headings:

• Quality of the management
• Intrinsic value
• Track record
• Understandability
• Prospects for the future

Got that? Well, you should be done here.

Whose got the reins on this horse?

Saying to look for those things is easy, of course. What, for a start, is meant by quality of management?

It's not his term.

But because he is seldom considerate enough to invent a whole vocabulary for his every move, the liberty has been taken.

More or less, it just means that you cannot expect success out of a firm with bad corporate officers.

All the accurate indicators in the world will not save it.

In any case, if the folks there are shady enough, they might have just forged those numbers.

As Buffett loves to point out, a respected name is built over years and demolished over one small misjudgment.

Shareholder Mom, Shareholder Dad, we have to talk

To put it another way, beware the company you keep.

Even so, management concerns aren't merely limited to outright fraud.

Are the managers keeping all the money for the company?

Is there ever going to be a check for shareholders?

If your company of choice is in real trouble, is there going to be a real discussion with you about it?

Where have we been?

Intrinsic value is the tough one of the bunch. How can you measure the real worth of stock?

There are a lot of indicators you can use.

Most involve finding stocks where company earnings are both high and fueled by shareholder capital, not debt.

At the end of the day, the real litmus test is going to be how you feel about the company.

And a real clue to inform that is its track record.

Don't just assume today's fluke numbers represent a million-dollar opportunity. Precisely the reason for maintaining years of records.

Warren hasn't invested in most new companies because his general minimum age is ten years.

Where are we going?

Youth is not the only thing keeping him from jumping on the tech bandwagon.

He's not too old to see that new inventions are the future.

However, he knows not every good idea deserves investment.

Computer chips made of plasma may overtake the world in five years.

But if Buffett doesn't know how they work, he usually leaves them be.

Ketchup companies may not be the defining symbol of the future.

But, A wise investor knows they may still have quite a future of their own. And a profitable one, too.

In it for the long haul

When asked when the right time to sell was, Buffett responded that the ideal situation would make it a moot point.

Preferably, you would own stock permanently.

His dictum paints a different picture than most day traders have the patience to see. In his system, it's as valid to make money purely from dividends as from timing some perfect moment to sell.

Money is money, one way or the other.

And somehow you might find this a little more ethical. There's something that feels like cheating when you buy part of a company for no other reason than to turn it over.

Buffett's idea, if a little obvious, might strike you as more wholesome.

Don't forget that there's a real tax incentive to be had by doing that.

He certainly has a lot of paperwork to complete.

Berkshire's income returns to the government are reported to be longer than a novel.