The Warren Buffett Way

Risk can be reduced greatly by concentrating on only a few holdings if it forces investors to be more careful and thorough in their research. Normally more than 75 percent of Berkshire’s common stock holdings are represented by only five different

A philosophy should supply guidance but not rigidity

company’s intrinsic value can be determined by estimating the future earnings of the company and multiplying those earnings by an appropriate capitalization factor.

When a stock of a strong company sells below its intrinsic value, act decisively.

Next, Graham insists that for a security to be considered an investment, two conditions must be present: some degree of safety of principal and a satisfactory rate of return.

Again Graham starts his answer with a succinct definition: intrinsic value is “that value which is determined by the facts.” These facts include a company’s assets, its earnings and dividends, and any future definite prospects.

But in the fifth year, he purchased his first controlling interest in a business—the Dempster Mill Manufacturing Company, a maker of farm equipment. Next he began buying shares in an ailing New England textile company called Berkshire Hathaway, and by 1965 he had control of the business.

“Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now. Over time, you will find only a few companies that meet those standards—so when you see one that qualifies, you should buy a meaningful amount of stock.”

That is why they are called principles,” Buffett once quipped.

Bertrand Russell one time, saying, ‘Most men would rather die than think. Many have.’ And in a financial sense, that’s very true.”