Warren Edward Buffett, the world's most successful investor, transformed a failing textile factory into the world's most profitable holding company. He is one of the world’s richest men and constantly ranks in the top 5 ranks of Forbes' ranking of billionaires. As of June 2022, his net income was estimated to be $100 billion.

He is well-known as one of the most successful investors in the world. Considering this, it is not astonishing that his investment strategy has become legendary. Buffett’s investment philosophy is world widely accepted. But what exactly are the keys to his success?

Warren Edward Buffett: A Brief History

One of the greatest investors of all time, Warren Buffett, is referred to as the "Oracle of Omaha." He is one of the richest people in the world. He is in charge of Berkshire Hathaway. Berkshire Hathaway has more than sixty businesses, such as Dairy Queen (a food chain restaurant), Duracell (the battery manufacturer), and Geico (an insurance company).

In 1930, Warren Buffett was born in Omaha. At a young age, he became passionate about business and investment, especially in the share market. Buffett began his studies at the Wharton School of the University of Pennsylvania before returning home to attend the University of Nebraska, where he earned a bachelor's degree in business administration. Later, Buffett attended the Columbia Business School, where he graduated with a master's in economics.

Early in the 1950s, Buffett started his career as a salesman, and in 1956 he founded Buffett Associates. In 1965, less than ten years later, he took over as CEO of Berkshire Hathaway. Buffett and Bill Gates launched “The Giving Pledge” initiative in 2010 to inspire other wealthy people to explore charity.

What Businesses Does Warren Buffet Own?

Warren Buffett has stock in several firms through his company, Berkshire Hathaway. American Express, Apple, Bank of America, and Coca-Cola are among his major interests.

Buffett's Investment Approach

When analyzing the association between a stock price and its performance, Warren Buffett looks for the low price by following approaches. These 6-step investment methods are a quick overview of his decisions before investing.

Performance Of The Company

The return on equity (ROE) describes stockholders’ return on investment (ROI). It shows the rate of return that shareholders will gain on their shares. Suppose a company has outperformed other businesses in the same sector, as measured by ROE. In that case, Buffett will consider it for investment.

But how is ROE calculated? ROE is calculated as Net Income divided by Shareholder’s Equity.

ROE= Net Income / Shareholder Equity

It's not enough to only look at the one-year ROE. The investor should review the ROE from the previous five to ten years to evaluate actual performance.

Debt-To-Equity Ratio

Another important factor Buffett considers before investing in any share is the D/E or debt-to-equity ratio. Buffett considers even a small amount of debt the company owes so that it can benefit from shareholders' equity rather than borrowed money. The following equation can measure the debt-to-equity ratio:

Debt to Equity Ratio or D/E = Total Liabilities / Shareholder Equity

The above ratio depicts the proportion of shareholder equity and the total debt a company uses to fund the firm's assets. The higher value of D/E suggests that more debt is used to finance the company rather than equity. This also depicts that it can lead to unpredictable profit and high-interest costs. Investors prefer long-term debt over total liabilities in the above equation for more authentic results.

Profit Margins Of The Company

The profit margin of a corporation or company not only depends on mere income or net profit but is also impacted by the company’s performance and increased sales. This can be calculated by:

Profit Margin = Net income/ Net sales.

Investors should go back at least 4 to 5 years for a decent idea of past profit margins. High-profit margins show that the firm is running its operations efficiently. The continuously increasing profit margins suggest that management has greatly managed or controlled total expenditures.

Company Profile

Buffett only considers the famous businesses that have maintained their reputation for at least 10 years. That’s why most of the businesses related to new technology that has been public recently didn’t get his attention. He mentioned that he had never invested in a business until he fully understood the company's nature.

The Securities and Exchange Commission (SEC) analyzes all companies’ data and produces financial statements regularly. These statements can help make great investment decisions based on past and present performances.

Is It Affordable?

Knowing the affordability and the profit this investment can generate are the most important and difficult skills that Buffett possesses. This can be measured by calculating the company’s intrinsic worth, like total profit, revenues, and current assets. Buffett is quite capable of finding accurate intrinsic value; thus, his mastery skill has generated millions of worth.

Commodity Reliance

This inquiry may appear to be an unconventional technique for narrowing down a firm at first. On the other hand, Buffett believes this is one of the important steps. He won’t invest in companies that offer similar services as others in the market or are typically dependent on natural commodities like gas or oil.

He considers the product or service of any business, making the audience willing to connect with the brand. Suppose a company doesn’t offer any unique aspect of service. In that case, the audience will eventually replace it with another brand.

So the characteristics that are hard to recreate or replicate will give an advantage to the company over competitors. Buffett calls it the company’s economic moat. This makes it difficult for competitors to get market shares.