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Tuesday, August 30, 2011

Warren Buffett - The Method of 12

Warren Buffett is Chairman of Berkshire Hathaway Inc., a U.S.A. holding company, with interests in several subsidiaries engaged in a number of diverse business activities.

Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company.

Berkshire Hathaway Inc. also has holdings or owns several large private companies.

When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing.

The business person wants to buy the whole company and the investor wants to buy portions of the company.

The Method of 12:

1) Is the business simple and understandable?

2) Does the business have a consistent operating history?

3) Does the business have favourable long-term prospects?

4) Is management rational?

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

7) Focus on return on equity, not earnings per share.

8) Calculate "owner earnings."

9) Look for companies with high profit margins.

10) What is the value of the business?

12) Can the business be purchased at a discount to its real value?

For every dollar retained, make sure the company has created at least one dollar of market value.

Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress.