Forum Archive Index - October 2000

["Philip Robinson" <robph639@student.otago.ac.nz>]

After reading a number of books on Buffet these are the rules I have put
together. And as most of you will know you can pretty much give up on the
NZSE as far as these are concerned.
I have also run into problems with forecasting per share equity values on
current and forecast growth rates from the Buffetology book. Anyway that is
the specifics these are the basics that he advocates. Phil.

Buffet Analysis

Nine questions to help one determine if a business is truly an Excellent one

1. Does the business have an identifiable consumer monopoly?
It will be either a brand-name product or a key service that people or
businesses are dependent on. A great product is where you start, but a great
product doesn't necessarily mean a great company

2. Are the earnings of the company strong and showing an upward trend
Five or more years of earnings information is required. One looks for an
annual per share earnings that are strong and show an upward trend.

3. Is the company conservatively financed
Star companies usually carry long-term debt of less than one times current
net earnings. Sometimes an excellent company with a consumer monopoly will
add a large amount of debt to finance buying another business, one has to
judge whether the acquisition is also a consumer monopoly or not.

4. Does the business CONSISTENTLY earn a high rate of return on shareholders
' equity?
A return on SH equity of 15% at least and preferably more. High rates of
return on equity are indicative of an excellent business.

5. Does the business get to retain its earnings?
One wants to invest in businesses that can retain their earnings and haven't
committed themselves to paying out a high percentage of their profits as
dividends. This way the shareholders can benefit from the full effects of
compounding, which is the secret to getting really rich.

6. How much does the business have to spend on maintaining current
operations?
Making is money is one thing, retaining it is another, and not having to
spend it on maintaining current operations is still another. The capital
requirements of a business may be so demanding that a company ends up having
little or no money left to increase the fortunes of its shareholders.

7. Is the company free to reinvest retained earnings in new business
opportunities, expansion of operations, or share repurchase? How good a job
does the management do at this?
Share repurchases increase per share earnings and expansion of operations
will hopefully utilise the retained earnings to give an above average rate
of return.

8. Is the company free to adjust prices to inflation?

9. Will the value added by retained earnings increase the market value of
the company?

10.  The company should not be in the commodity business!



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