Warren Buffett, also known as the “Oracle of Omaha,” is an investing legend. The chances are, if you have any experience with the stock market, then you know who he is.
He is regarded by many as one of the best if not the best investor in the world. However, he does go about investing in a unique way, a method which he has stood by for decades.
I believe that one of the best ways to increase your portfolio performance is to look at what the top guys in the world are doing and how they evaluate companies.
Let’s take a look at how Warren Buffett does this.
Buffett likes to evaluate his potential investments using the four Ms.
These are meaning, management, moat, and margin of safety.
First let’s look at meaning.
Buffett recommends looking at companies that not only mean something to you but are also in your wheelhouse of comprehension. The more you know about the sector of a potential company, the easier it will be for you to understand and evaluate that company.
For example, he loves to drink Coke (KO), so it’s no surprise that he owns around 400 million shares of the company.
Next, he likes to look at and evaluate the management. He wants to see who the CEO is, how long that CEO has been there, and if he or she has big goals for the company and is always looking to take care of the shareholders.
There is nothing worse than when a CEO of a company in which you have money invested doesn’t do their job to the best of their ability. This can result in a company failing to grow over the long term or, worst-case scenario, management take massive bonuses and files for bankruptcy, which means all the shareholders lose everything.
The next “M” is a moat, which is exactly what it sounds like. Does that company have something that allows it to stand out from its competitors, a method or way of doing business that to make it harder for anyone else to swoop in and drive them down?
We all know what Coke is. What’s harder to appreciate is that Coke has a massive moat because no one knows their secret formula and because they have established their brand worldwide. That is why they are able to charge higher prices for their product versus the competition for what essentially sugar mixed with water and compressed gas.
The final “M” we want to look at is the margin of safety.
What this means is Buffett is looking to buy shares at a price well below market value. He wants to buy $10 bills for $5, or in other words, half off.
What this does is increase your potential for overall gains since you are getting a wonderful company at a discount. This strategy also lowers your at-risk capital. Sounds like a win-win situation!
The market runs off of one thing and that is emotion. Whether its a piece of news or an event, like we are currently in, people base their buying and selling decisions off emotions for the most part.
Warren Buffett says ignore all that and do the opposite. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” he has said.
I know this sounds odd, but think of it like this: When everyone is selling shares of a company you want to buy, that price is being driven down, which means you will be able to get in at a lower price.
On the other side, when everyone is buying shares of a company that you already own, you can sell some or all of your shares at that hopefully much higher price than at which you first bought.
Afterward, you can sell at a big profit and take that money to invest in another company, again using the Buffett’s four Ms.