Warren Buffett's Style

1. A sucessful stock  investment is a result first and foremost of the underlying business. The business should able to generate earnings at an increasing rate each year.
2. Stock is a bonds with variable yields - the yields equate to firm underlying earnings. A good business with predicatable and consistent earning growth more valuable than a risk free bond with unchanging yield.
3. Stock Criteria
1. Company produce products or services will be in constant and  growing demand.
2. High annual rate of return - >= 15% annualy over many years - exclude new companies where only a few years of financial data exists.
3. Business that are easy to understand. Buffett adamantly restricts himself to his "circle of competence" - businesses he can understand and analyze. Investment success is not a matter of how much you know but rather how realistically you define what you don't know.
4. Two basic types of businesspr
1. Commodity- based firms 
1. Product sold in highly competitive markets where price plays the key role in a consumer purchase decision. 
2. Highly competitive and dominated by lowest-cost producer. 
3. Compaies need to spend high capex to maintains the existing operations and leave less budget for new products. 
4. Companies need top-notch management to survive. 
5. Low profit margin, low ROE, no brand name, multiple competitors, substantial production capacity, profit erratic;  
   
6. Buffett does not purchase this type of business.
2. Consumer monopolies 
1. No effective competitor due to economic moat.
2. Inflation-adjusting ability - Companies can pass the cost to customer.
3. Real value is in their intangibles - brand-name loyalty, regulatory
   licenses, and patents. Do not have to rely heavilly on investment in land, plant, and equipment and they tend to have large cash flow and low debt.
4. Question to check if a company is a consumer monopolies - If he had access to billions of dollars and the top 50 managers in the country, could he start a business and compete with the business in question?
5. Businesses that make products that wear out or are used up quickly and have brand-name appeal that merchants must carry to attract customers. E.g. Coke, Leading Newspaper, Drug Companies with patents, Popular Brand Name Restaurant - McDonald. Higher product turnover implies more revenue for the company.
6. Communications firms that provide services businesses must use to reach consumers. E.g. advertising agenciens, magazine/newspaper publisher, and telco networks.
7. Boring Consumer services (essential) that always in demand - low capex and low paid work force. A stable, efficient, easy-to-operate business that will have a long-lasting life E.g. tax preparers - H & R Block; Mad Service - ServiceMaster, Credit Card - Amex & Dean Witter Discover.
4. How to judge management’s ability?
1.  A strong upward trend in earnings: Buffett seeks year-by-year increases in earning - an indication that management able to turn consumer monopoly advantage into shareholder value.
2. Conservative financing: consumer monopoly companies have strong cash flow and seldom need a long term financing. Buffett does not object to the use of debt for a good purpose, e.g. to purchase another consumer monopoly (Capital Cities acquired ABC television and radio); buffett does object if added debt to produce mediocre result, e.g. purchase commodity business.
3. A consistently high return on shareholder’s equity: ROE > 15% prove that management can make money from its existing business and can profitably employ retained earnings
4. A high level of retained earnings: real growth in stock value comes from reinvesting earnings to expand operations or purchase new ventures. Buffett don't like company paying out high percentage of profits as dividends.
5. Low level of spending needed to maintain current operations: then more money can be allocated to finance expansions or new ventures.
6. Profitable use of retained earnings: it requires managerial talents to determine which alternative (buy profitable business ventures, expand operations, repurchase existing shares) offers the greater investment return to shareholders.  Buffett views share repurchases favorably - EPS increase.
5.  Stock Price
1. Graham would buy a stock below their intrinsic value and this will provide investors with a margin of protection. 
2. Buffett - If a business is mediocre, the stock will do poorly even if purchased cheaply. And the gain will be limited to the difference between the purchase price and
    intrinsic value (only if stock price eventually reaches that level and it is very rare). 
3. Buffett views the underlying business as the investor’s “margin of protection.” He targets successful businesses with expanding intrinsic values, and buy at a price that makes economic sense.   
1. What it can reasonably earn based on the kind of business it is in, and based on the quality of the management running the company
2. He purchases the stock if he believes he can earn an annual rate of return of at least 15% for at least five or 10 years.
3. Earnings Yield - EPS/Price  - a quick & crude method of comparing similiar stocks.
4. Stock Price formula 1 - What Stock Price to pay? EPS/Long term gov bond yield. Same initial return with government bonds; if eps growing each year - the return will increase.
5. Stock Price formula 2 - Use pass 10 year EPS CAGR to forecast EPS on next 10 yr, then use the avg P/E to determine the stock price on next 10 yr. And discount the stock price and dividend received each year to present value with return rate at least 15%. Or alternately, use the future price to calculate the rate of return based on current price.
6. Stock Price formula 3 - projects the future owner's earnings, then discounts them back to the present. Owner's earnings = net income + D&A - CAPX - (change in W/C).
7. Take advantages of "bargains" - bear market drives all price down.
8. Buffet is not adverse to buy stocks at higher valuation if he is confident of earning expansions.
6. When to Sell?
1. Benjamin Graham, favored a sale when a company’s share price reached its intrinsic value.
2. Buffett believes it makes more sense to hold indefinitely, putting off capital gains taxes, and enjoying the fruits of compounding intrinsic value if business continues to have earnings growth greater than alternative investments.
3. Sell if 
1. the nature of the business changes
2. management changes
3. an alternative investment offered a better return.
7. Portfolio & Risk Management
1. Buffett does not favor extensive diversification.
2. Buffet does not diversify based on industry sectors  - the avoidance on commodity type business leads to the exclusion of certain groups.
3. How to control risk?
1. investing in expanding businesses
2. understand and analyze the nature of the businesses
3. do not pay too much for the shares.
8. Warren Buffett Quotes
1. Rule No. 1: never lose money; rule No. 2: don't forget rule No. 1
2. Honesty is a very expensive gift, Don't expect it from cheap people.
3. The most important thing to do if you find yourself in a hole is to stop digging.
4. Risk comes from not knowing what you're doing. 
5. You never know who's swimming naked until the tide goes out.
6. The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. 
7. I have pledged... to always run Berkshire with more than ample cash... I will not trade even a night's sleep for the chance of extra profits. 
8. Be fearful when others are greedy and greedy when others are fearful.
9. It's better to hang out with people better than you. Pick out associates whose behavior is better than yours and you'll drift in that direction.
10. I always knew I was going to be rich. I don't think I ever doubted it for a minute.
11. I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.
12. Wide diversification is only required when investors do not understand what they are doing.
13. We will only do with your money what we would do with our own.
14. In the short run, the market is a voting machine, but in the long run it is a weighing machine.
15. Cash combined with courage in a time of crisis is priceless.
16. The Stock Market is designed to transfer money from the Active to the Patient.
17. For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up.
18. Buy companies with strong histories of profitability and with a dominant business franchise.
19. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well. 
20. If you don't feel comfortable owning something for 10 years, then don't own it for 10 minutes.
21. Price is what you pay. Value is what you get.
22. You shouldn't own common stocks if a 50 per cent decrease in their value in a short period of time would cause you acute distress.
23. Risk can be greatly reduced by concentrating on only a few holdings.
24. Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.
25. I never buy anything unless I can fill out on a piece of paper my reasons. I may be wrong, but I would know the answer to that. 
26. Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
27. You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.
28. I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.
29. Wide diversification is only required when investors do not understand what they are doing.
30. Chains of habits are too light to be felt until they are too heavy to be broken.
31. Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.
32. We don't have to be smarter than the rest. We have to be more disciplined than the rest.
    If you have more than 120 or 130 I.Q. points, you can afford to give the rest away. You don't need extraordinary intelligence to succeed as an investor.
33. Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.
34. Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.
35. If a business does well, the stock eventually follows.
36. Time is the friend of the wonderful company, the enemy of the mediocre.

References:-

• Buffettology: Warren Buffett Quotes & Value Investment Strategy for Stock Picks
• What Is Warren Buffett's Investing Style?
• The Warren Buffett Approach to Investing (PDF) 
• Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World’s Most Famous Investor