Connect with us

Markets

Inside Warren Buffett’s Brain

Published

on

What springs to mind when you think of legendary investor Warren Buffett?

For some, it’s his humble Omaha origins or his long-lasting obsession with Coca-Cola. For other people, it’s Buffett’s impeccable investing track record and extraordinary wealth that make a lasting impression.

While these are all legitimate connections to make with the Buffett name, perhaps he is most synonymous with the discipline of value investing – the style and mindset Buffett has made famous over the decades.

The Warren Buffett Series

Part 2: Inside Buffett’s Brain

Today’s infographic provides a deep dive into Warren Buffett’s brain, and it explains everything about his investing philosophy, along with the framework he uses to evaluate potential opportunities.

It’s the second part of the Warren Buffett Series, which we’ve done in partnership with finder.com, a personal finance site that helps people make better decisions – whether they want to jump on the cryptocurrency craze or follow Buffett’s more traditional path to financial success.

The Warren Buffet Series: The Early YearsInside Warren Buffett's BrainPart 3Warren Buffett's Biggest Wins and FailsBest Buffett Quotes

Inside Warren Buffett's Brain
Note: Stay tuned for future parts with our free mailing list.

Warren Buffett’s investment philosophy is well-known.

He famously focuses on the intrinsic value of companies, and he buys stocks when they are “on sale”. Buffett’s not afraid to accumulate big positions in companies he likes – and his favorite holding period is “forever”.

While this formula may seem simple on paper, it’s extremely nuanced and complex in practice.

How Does Buffett’s Brain Work?

Warren Buffett has said that he borrows 85% of his investing style from Benjamin Graham, and 15% from Phil Fisher.

Benjamin Graham:
The godfather of value investing gave Buffett a framework for finding undervalued assets and companies.

Phil Fisher:
The famous growth investor showed Buffett the importance of investing with good management teams.

According to writer Robert Hagstrom, Buffett applies these ideas by focusing on four key principles of investing:

1. Analyze a stock as a business
Have the priorities of a business owner and look the company from a long-term perspective.
Is it increasing its intrinsic value? Would you want to own the entire company?

2. Ensure a “margin of safety”
Buffett considers “margin of safety” the three most important words in investing.
In other words, does a company have more intrinsic value than book value?

3. Manage a focused portfolio
Concentrate on a few stocks that will provide above-average returns over time. Buffett suggests investors think of this as owning a “punch card” with just 20 investment choices that can be made over a lifetime.

4. Protect yourself from Mr. Market
Mr. Market can be speculative and emotional, and he should not be relied upon as a predictor of future prices.
Instead, take advantage of Mr. Market periodically, whenever there is a fire sale.

Buffett’s Investment Criteria

Here are 12 key factors Warren Buffett considers when looking at potential opportunities:

1. Simplicity
Is the business easy to understand?

2. Operating History
Has the business been around for a long time, with a consistent operating history?

3. Long-Term Prospects
Is there reason to believe that the business will be able to sustain success in the long-term?

4. Rational Decisions
Is management wise when it comes to reinvesting earnings or returning profits to shareholders as dividends?

5. Candidness
Does the management team admit mistakes? Are they honest with shareholders?

6. Resisting the “Institutional Imperative”
Can the company resist temptations created by institutional dynamics, such as imitating peer companies, or resist changes in direction?

7. Profit Margins
Does the company have high profit margins?

8. Return on Equity
What is the return on equity (ROE) of the business?

9. Owners Earnings
What is the company’s ability to generate cash for shareholders, who are the residual owners? This is technically defined as free cash flow to equity (FCFE).

10. One Dollar Premise
For every dollar retained from net income, does the company create at least one dollar of market value?

11. Intrinsic Value
What is the value of the future owners’ earnings, discounted back to the present?

12. Margin of Safety
What’s the chance you’ll lose money on the stock, in the long run, if you buy it at today’s price?

Or to sum all of these ideas up succinctly, here’s a quote from the man himself.

My strategy is to find a good business – and one that I can understand why it’s good – with a durable, competitive advantage, run by able and honest people, and available at a price that makes sense.

– Warren Buffett

Other Notes

Part 3 of the Warren Buffett Series will be released in late February 2018.

Credits: This infographic would not be possible without the great biographies done by Roger Lowenstein (Buffett: The Making of an American Capitalist) and Alice Schroeder (The Snowball), as well as numerous other sources cataloging Buffett’s life online.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Comments

Green

New Waves: The ESG Megatrend Meets Green Bonds

With ESG investing outperforming benchmarks, could green bonds be next in line? We unpack the megatrend taking hold of the financial world.

Published

on

New Waves: The ESG Megatrend Meets Green Bonds

It’s clear that sustainable investing has been thrown into the limelight.

Increasingly, investors are seeing both the financial and social imperative for sustainable investing. In particular, the rapid growth of green bonds—a fixed income investment that is designed to raise funds for the climate or environment—is booming.

The above infographic from Raconteur navigates the growing green bond market against the backdrop of the broader ESG (environmental, social, and governance) investing shift.

Gathering Steam

By the end of 2020, $45 trillion in assets will adhere to sustainable practices, including ESG principles.

Despite the loss of confidence from COVID-19, investors flocked to sustainable-focused funds.In fact, global fund flows hit record levels for Q2 of 2020—surpassing $71 billion.

The fund flows are not without financial warrant. Between April 2015 and April 2019, average returns of socially responsible investments (SRI) outperformed their non-SRI peers. At the same time, 94% of sustainable indices realized stronger returns than their benchmarks between January and March 2020.

The accelerating demand for sustainable investments may seem like old news, but green bonds offer a new avenue.

What Are Green Bonds?

Green bonds raise money for climate and environmental projects, and are issued by governments, corporations, and financial institutions.

Multilateral development banks, which include the European Investment Bank and the World Bank, initially brought them to market in 2007, though they had a slow start. However, in 2019, new issues of green bonds topped $258 billion worldwide—jumping 51% in one year.

Across the green bond market there is a broad spectrum of different debt instruments. These include private placements, covered bonds, and green loans.

Green private placements occur when the sale of bonds are made to private investors, rather than through public offerings. Green covered bonds, on the other hand, are bonds that are backed by a group of assets that are sustainably-focused. Green loans are forms of loans that are meant to finance green projects.

Overall, green bonds can be diversified across a number of different sectors.

The Top Purposes for Green Bonds

What are the top sectors for green bond issuance?

Category20152019
Alternative energy$30.4B$143.8B
Green building$10.7B$63.5B
Sustainable transport$3.7B$58.7B
Energy efficiency$9.5B$47.6B
Sustainable water$3.1B$23.8B
Pollution prevention$1.4B$18.1B
Climate adaptation$1.8B$15.0B
Sustainable forestry/agriculture$1.1B$11.3B

Source: MSCI

Alternative energy, accounting for over $143 billion in green bonds, outpaces all other sectors by a wide margin. Within four years, renewable energy bond issuance has more than quadrupled.

Meanwhile, green building bonds are garnering attention. These instruments finance the construction of energy efficient buildings. Within the industry, a notable green building certification system is the LEED standard, also internationally recognized. Often, real estate investment trusts (REITs) are involved in issuing green building bonds.

Interestingly, Big Tech is also becoming more active within the green bond landscape. Google’s parent company, Alphabet, has issued a record $5.8 billion in corporate sustainability bonds to fund everything from energy efficiency projects to affordable housing.

The Top 10 Countries for Green Bonds

On a country-by-country level, green bonds are most common in the U.S., China, and France.

RankCountryGreen Bond Issuance2018-2019 Change (Amount)
1🇺🇸U.S.$50.6B44%
2🇨🇳China$30.1B1%
3🇫🇷France$29.5B113%
4🇩🇪Germany$18.7B144%
5🇳🇱Netherlands$15.1B105%
6🇸🇪Sweden$10.3B66%
7🇯🇵Japan$7.2B73%
8🇨🇦Canada$7B63%
9🇮🇹Italy$6.8B128%
10🇪🇸Spain$6.5B3%
Top 10 Total$181.8B49%

Source: Climate Bonds Initiative

Germany issued its first multi-billion dollar government green bonds in just 2019. One catalyst behind this was the European Central Bank’s announcement that the environment would become a “mission critical” priority going forward.

This may contribute to the fact that both Germany and France saw the biggest change between 2018 and 2019.

Opening the Floodgates

As sustainable investing becomes front and center on the global agenda, questions about its impact on returns have arisen.

During times of both extreme exuberance and market crisis, companies with higher sustainability ratings have outperformed their respective benchmark. However, there is still a long way to go. Even with the record issuance of green bonds in 2019, they make up just 3% of all global bonds issued.

As demand for sustainable investments quickly grows, could it spell a watershed decade ahead for green bonds?

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Markets

The 20 Most and Least Profitable Companies, Per Employee

The U.S. companies on the Fortune 500 boast $1.2 trillion in combined profit—but which bring in the best and worst profit per employee?

Published

on

The 20 Most and Least Profitable Companies, Per Employee

The Fortune 500 is an elite club of the biggest American businesses, which combined to generate profits of over $1.2 trillion in 2019.

But how much profit do these companies make on a per employee basis?

This visualization uncovers the answer by comparing the 20 companies with the most and least returns per employee, using calculations from Tipalti (based on the Fortune 500 list).

Top 20: Most Profit per Employee

Diving right in, the companies that make the most money per employee may surprise you.

Housing giants Fannie Mae and Freddie Mac take two of the top three spots, bringing in $1.9 million and $1.0 million per employee respectively in 2019.

The two U.S. government sponsored enterprises (GSEs) are major players in the secondary mortgage market, buying and repackaging nearly half the mortgages in the country. The duo was allowed to retain their profits as of October 2019, instead of returning them to the U.S. Treasury.

CompanySectorProfit per EmployeeProfits ($M)Employees
Fannie Mae
(Federal National Mortgage Association)
Financials$1,888,000$14,1607,500
KKRFinancials$1,448,699$2,0051,384
Freddie Mac
(Federal Home Loan Mortgage Corporation)
Financials$1,046,721$7,2146,892
NRG EnergyEnergy$969,631$4,4384,577
EOG ResourcesEnergy$943,103$2,7352,900
BiogenHealth Care$795,811$5,8897,400
Blackstone GroupFinancials$705,680$2,0502,905
ConocoPhillipsEnergy$691,250$7,18910,400
Enterprise Products PartnersEnergy$628,904$4,5917,300
VisaBusiness Services$619,487$12,08019,500
Simon Property GroupFinancials$560,533$2,1023,750
Gilead SciencesHealth Care$456,441$5,38611,800
OneokEnergy$443,789$1,2792,882
FM GlobalFinancials$443,391$2,4795,591
MastercardBusiness Services$436,452$8,11818,600
Cheniere EnergyEnergy$423,529$6481,530
FacebookTechnology$411,308$18,48544,942
AppleTechnology$403,328$55,256137,000
Cincinnati FinancialFinancials$384,038$1,9975,200
Massachusetts Mutual Life InsuranceFinancials$373,989$3,7019,896

Apple employs 137,000 people—the largest workforce by far among the 40 companies profiled—but still makes $403,328 per employee. Facebook is the only other tech giant to bring in more money per employee at $411,308.

Bottom 20: Least Profit per Employee

On the other end of the spectrum, Uber is one of the most well-known companies currently bleeding profits, losing $316K per employee. In fact, the ride-hailing service lost approximately $1.8 billion in the second quarter of 2020 alone.

CompanySectorProfit per EmployeeProfits ($M)Employees
ApacheEnergy-$1,123,301-$3,5533,163
EnLink MidstreamEnergy-$825,830-$1,1191,355
Brighthouse FinancialFinancials-$556,391-$7401,330
PG&EEnergy-$332,870-$7,65623,000
Frontier CommunicationsTelecommunications-$322,706-$5,91118,317
Uber TechnologiesTechnology-$316,208-$8,50626,900
HessEnergy-$229,859-$4081,775
CotyHousehold Products-$199,158-$3,78419,000
Devon EnergyEnergy-$197,222-$3551,800
Altria GroupFood, Beverages & Tobacco-$177,123-$1,2937,300
National Oilwell VarcoEnergy-$175,927-$6,09534,645
Equitable HoldingsFinancials-$171,584-$1,73310,100
Chesapeake EnergyEnergy-$133,913-$3082,300
CenturyLinkTelecommunications-$123,976-$5,26942,500
MosaicChemicals-$84,683-$1,06712,600
AlcoaMaterials-$81,522-$1,12513,800
Targa ResourcesEnergy-$77,985-$2092,680
Voya FinancialFinancials-$58,500-$3516,000
WayfairRetailing-$57,992-$98516,985
Occidental PetroleumEnergy-$46,319-$66714,400

COVID-19 has also had an intense effect on some of the companies at the bottom end of the profit per employee spectrum. Chesapeake Energy and Frontier Communications are just two examples that have filed for Chapter 11 bankruptcy in recent months—they each lost $134K and $322K per employee in 2019 respectively.

I’m pretty confident we will see more bankruptcies than in any business person’s lifetime.

James Hammond, CEO of BankruptcyData

Profit per Employee by Sector

When all the companies in the Fortune 500 are taken into account, sector-specific numbers reveal interesting trends.

Financials bring in the most profit per employee at $116K, while Food and Drug Stores see 17 times less profit at $6.7K per employee. In fact, eight out of the top 20 most profitable companies are found in the financial sector.

SectorProfits per EmployeeProfits ($M)Employees
Financials$116,228$378,4453,256,067
Technology$87,532$252,8362,888,490
Energy$85,547$75,410881,505
Media$57,947$21,634373,333
Health Care$54,679$145,1662,654,872
Telecommunications$50,636$38,251755,417
F&B incl. Tobacco$41,946$42,9241,023,317
Business Services$39,354$36,835936,000
Chemicals$27,977$11,328404,888
Apparel$26,154$7,776297,300
Industrials$25,827$27,0061,045,675
Aerospace & Defence$24,793$23,903964,100
Household Products$24,504$10,415425,038
Transportation$21,762$32,4541,491,358
Engineering & Construction$19,648$6,773344,716
Materials$13,408$6,024449,252
Retailing$10,373$67,3186,489,923
Hotels, Restaurants & Leisure$9,653$16,8801,748,714
Wholesalers$9,025$5,842647,312
Motor Vehicles & Parts$8,113$7,108876,123
Food & Drug Stores$6,746$8,3551,238,645

Interestingly, as a whole, the energy sector comes in third place in terms of profit per employee at $86K—that said, nine out of the bottom 20 least profitable companies are also found in this highly volatile industry.

Though the vast majority of businesses impacted by COVID-19 have been small to mid-sized companies, the above calculations also show that Fortune 500 companies are not safe, either.

Subscribe to Visual Capitalist

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Continue Reading

Subscribe

Join the 200,000+ subscribers who receive our daily email

Thank you!
Given email address is already subscribed, thank you!
Please provide a valid email address.
Please complete the CAPTCHA.
Oops. Something went wrong. Please try again later.

Popular