Don't understand stock options? BUFFETT TEACHES YOU 4 STEPS TO CHOOSE VALUE STOCKS!

Warren Buffett's Investment Experience and Philosophy

Speaking of investment masters, how could Warren Buffett fall?! Warren Buffett, born in Omaha, Nebraska in 1930, known as the “Prophet of Omaha,” also known as the “God of Stock,” is a respected and beloved investment master, entrepreneur, billionaire, and philanthropist. Every year, huge crowds of fans travel to Omaha to hear him give a speech at the Berkshire company's annual convention.

Buffett's father was a stockbroker and a former member of the U.S. Congress. When Buffett was a child, he developed an interest in investing and making money, and everyone around him said he was a math prodigy. He made his first stock investment at the age of 11 and made a meager profit from it. At the age of 13, he started his own business as a newspaper boy. During high school, he and his friends invested in a used pinball machine at an initial cost of $25, eventually selling for $1,200.

On the subject of his studies, he studied business at the University of Pennsylvania and the University of Nebraska, followed by Columbia University from Benjamin Graham and earned a master's degree in economics, and then went on to study at the New York School of Finance.

After graduation, he worked as an analyst with Graham Newman in Graham, and in 1956 founded Buffett Partners Limited in Omaha, where he amassed a fortune of millions.

He later saw a textile company called Burkhill Hasaway, which began in partnership with Charlie Munger and took control of the company in 1965, and gradually grew the company into a diversified company with investments in insurance, energy, utilities, transportation, manufacturing, retail, and more.。 The company is a bit like an investment vehicle for the implementation of the investment philosophy of Buffett, who through this company, acquires mature but undervalued companies and retains a large number of shares in leading companies.

What did he do when he accumulated a lot of wealth? In 2006, Buffett announced that he would put his wealth into philanthropy, with 85% of it donated to the Bill and Melinda Gates Foundation (which focuses on issues such as world health, American libraries, and schools around the world), which shocked the world. Before that, he also worked in charity.

In addition to acts of charity, there is so much to say that Buffet is famous for being famous! For example: “You should invest in a business that a fool can also run, because one day a fool will run it.” “Life is like rolling snowballs, the important thing is to find very wet snow and long slopes.” “The first rule of investing is not to lose money; the second rule is to never forget the first.” “If you're uncomfortable with owning a stock for 10 years, you shouldn't have it for 10 minutes.” “Be vigilant when others are greedy, and be greedy when others are vigilant.”

It is worth mentioning that he writes a letter to Berkshire shareholders every year, which is considered a must-read classic by the industry. The Buffett Way, written by Robert Hagstrow, also sums up a lot of Buffett's investment wisdom.

So what are the specifics of Buffett's investment wisdom? He insists on value investing, always looking for risk-controlled investments. He emphasizes the intrinsic value of the company (related to competitive advantage, financial condition, management team, etc.) and does not invest in companies that he does not understand or that are outside his circle of competence, emphasizing reasonable prices, safe margins, and long-term investments.

Warren Buffett's Stock Option Policy

So what can Buffett's investment philosophy offer us in terms of stock selection strategy? Let's take a look at his specific stock selection criteria.

1. THE BUFFETT WAY SUMMARIZES 12 GUIDELINES IN 4 ASPECTS.

• Business aspects include a simple model, a stable operation, and a good long-term outlook. These guidelines are about “what is a good business”.

• The market aspect includes determining the market value of the business and buying at a discount. That has to do with valuation and safety margins.

• Management aspects include management rationality, honesty, and independent thinking. You can see that Buffett still cares a lot about the management side.

• Here are 4 financial guidelines:

① Emphasize return on net assets rather than earnings per share. Since companies usually keep profits from the previous year, earnings per share will usually increase, so this figure makes little sense. Better performance is measured by ROE (net profit/net assets, net profit/shareholders' equity), which represents how much net profit a unit of net assets can generate.

② Calculate the true “shareholder surplus”. Shareholders' profit is essentially free cash flow, based on net profit, plus depreciation, loss and amortization, minus capital expenditures. Through such indicators, go to the companies that generate more cash than they consume.

③ Find businesses with high profitability. High profitability reflects both the ability of the company's management and the company's ability to control costs.

④ Create a market value of at least $1 per dollar of retained earnings. For example, if a company's retained earnings for the past decade are added to X, the increase in market capitalization for this decade is Y, and if Y is less than X, it indicates that the company is not using retained earnings effectively and the company is regressing.

2. In a 1977 letter to shareholders, Buffett outlined four principles for his selection: an understanding company, a good long-term outlook, a virtuous manager, and an attractive price. These four fundamentals and the above mentioned principles in terms of business, markets, and management are consistent.

3. In a 1987 letter to shareholders, Buffett said that a good investment should meet two conditions: one is that the average ROE over the past decade is higher than 20%, and the second is that there is no one-year ROE below 15% for the past decade. BUFFETT IS VERY IMPORTANT FOR ROE THIS INDICATOR.

4. Buffett has repeatedly mentioned in public his emphasis on this indicator of gross margin. In Berkshire's long-held stocks, the gross margin (gross profit/operating income) is basically above 40%.

5. Debt to equity ratio (debt/shareholder equity) is also an indicator that Buffett will consider. A company with too much debt can mean that the company is too aggressive, so there is a higher risk for investors to take.

How do we apply these principles?

Based on Buffett's stock option principle, how do we get it into a specific stock option?

First, we can get the following quantitative indicators in a more direct way:

1. BEET> 20%

2. Gross Profit Ratio > 40%

3. Free Cash Flow>0

As for “Buy at a discount” and “Debt to Equity Ratio”, at the preliminary screening stage, we can reduce them to the market earnings and asset liability ratios, respectively, which are easier to filter:

1. Market Yield: This indicator is usually compared to historical levels and industry averages. So here we can first set a value of the valuation distribution < 70%, ensuring that it is not in the range of the highest 30% in history, and of course you can set this specific value according to your own judgment.

2. Liability ratio: The market generally believes that the financial risk comparison is manageable if the asset ratio is < 60%.

What else can be done in concrete terms?

Next, we will make an initial selection using the Futubull Selector on the basis of the US shares.

Of the above 5 indicators, in addition to free cash flow, we can filter directly for the other 4 indicators.

We filtered 143 stocks through these quantitative indicators (based on data as of November 7, 2023). Next, the qualitative part of the above-mentioned Buffett Stock Option Policy comes into play, including content related to corporate and management guidelines.

For example, these 143 companies include Google. About this company, we've taken a detailed look at the Star Company Financial Season Guide to give you some information about its model, operations, prospects, and more to help answer the question of “Is it a good business?” For other companies, you can also refer to some of the ideas in the class in Namun, and then disassemble them.

Then in this section of management, we can go to see the specific management team for each company in the Brief tab for each of the shares, go to the search managers for more information to understand and analyze.

*Note: The images shown on the screen are for illustrative purposes only and do not constitute any investment advice or guarantee.

Hope this content and expansion about Buffet will help you.