Connect with us

Personal Finance

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
Click for Comments

Healthcare

Ranked: The Best U.S. States for Retirement

Getting ready for retirement? See which states score the highest in terms of affordability, quality of life, and health care.

Published

on

Ranked: The Best U.S. States for Retirement

What is the most important aspect of retirement planning?

If you said finances, you’re probably right. But have you ever thought about where the best place is to retire? Being strategic about location can make a big impact on your quality of life, and perhaps help your savings go just a bit further.

To help break it down, we’ve visualized data from personal finance platform, WalletHub, which ranked the best U.S. states for retirement as of 2023.

Data and Methodology

WalletHub ranked each state using 47 metrics across three dimensions.

  • Affordability (7 metrics worth 40 points)
  • Quality of Life (22 metrics worth 30 points)
  • Health Care (18 metrics worth 30 points)

Here are some examples of what each dimension measures:

  • Affordability: Cost of living and taxation
  • Quality of Life: Quality of elder-abuse protections and crime rates
  • Health Care: Number of health professionals per capita and life expectancy

Visit the source for the full list of metrics.

The final scores (visualized as the bars in the infographic above) represent each state’s weighted average across all metrics. See below for more comprehensive results.

RankStateScoreAffordability
(rank)
Quality of Life
(rank)
Health Care
(rank)
1Virginia57.6161111
2TFlorida57.49428
2TColorado57.414275
4Wyoming55.65938
5Delaware55.563318
6New Hampshire55.03157
7South Dakota53.625309
8Minnesota53.54021
9Idaho53.2151731
10North Dakota53.0222520
11Utah52.7202426
12North Carolina52.6122335
13Missouri52.4172832
14Pennsylvania52.336312
15TMontana52.1241529
15TSouth Carolina52.143839
17Massachusetts51.94712
18California51.6321910
19Alaska51.326368
20Arizona51.1183525
21Wisconsin50.9341417
22Alabama50.714450
23Ohio49.827837
24Hawaii49.738294
25Nebraska49.3371615
26Iowa48.9351224
27Georgia48.674042
28Michigan48.0291836
29TMaine47.543613
29TNew Mexico47.5214630
31Indiana47.3233140
32TNevada47.2114241
32TTennessee47.224845
34TVermont47.14876
34TConnecticut47.144263
36Kansas46.8303233
37West Virginia46.434349
38Oregon46.1412121
39Texas45.9283734
40Rhode Island45.0393914
41Arkansas44.784944
42Maryland44.6462019
43Washington44.5451323
44Illinois44.3422227
45Louisiana43.9134547
46New York43.7501016
47Oklahoma43.6194743
48Mississippi40.8105048
49New Jersey40.2493422
50Kentucky38.8334146

According to this methodology, Virginia is currently the best state for retirement. Although the Southeastern state does not excel in any one dimension, it scores consistently well across all three to create a very balanced retirement profile.

This gives it a slight advantage over second place Florida, which excels in quality of life and affordability, but falls further behind in terms of health care. Third-placed Colorado is a mirror of Florida, offering excellent health care but a lower quality of life in comparison.

How to Interpret These Results

It’s important to remember that this ranking is purely based on data and the methodology above, and may not be tailored to your individual preferences.

For example, if you believe that health services will be very important during retirement, you may rank Minnesota (#1 in terms of health care) much higher than eighth place.

You may notice that prioritizing one dimension will often come at a trade-off in others. Looking at Minnesota once more, we can see that the state is also one of America’s most expensive.

Looking to retire outside of the U.S.? Check out this graphic on the top 25 countries to retire in.

Continue Reading

Subscribe

Popular