posted by on Jun 25
This second part of this series on Value Investing will focus on another important part of Warren Buffett’s methodology when it comes to picking the best stocks. But before I begin talking about this part of his methodology, I would like to remind you that this is not the only methodology available out there, there are countless others that one cannot ignore. However, you would be crazy not to study and clearly understand the methodology of arguably the most successful investor in history. So while I’m advocating that all budding investors that wish to be very successful should adopt Buffett’s methodology, I am also suggesting that you should not limit yourself to just this one methodology.
Now that I’ve cleared that up, I can focus on the main topic of this article which is another component of Warren Buffett’s methodology. This component is known as choosing stocks which have proven longevity on the stock market. By this, I mean that you should only consider companies that have been around (listed on the stockmarket) for at least 10 years. As a result, Warren Buffett does not consider most technology companies that have gone public in the past decade. It must not be forgotten that Buffett is an astute investor that only invests in what he understands, and new, young technology companies is an industry and sector that Buffett does not understand. Hence, he does not invest in them.
Now why is longevity important when it comes to value investing? Firstly, value investing means looking at companies that have stood the test of time, but are currently undervalued. Secondly, the historical performance of a company should never be underestimated because it tends to demonstrate the company’s ability (or inability) to increase shareholder value. However, by the same token, that past performance of a stock is and should not be a guarantee of future performance. As a result, the investor is left with the tricky task is determining whether past performance will continue to emulated in the future.
Nevertheless, as I said in the first and second paragraphs, don’t let this part of the Buffett methodology make you give up on investing in technology stocks. It is for this reason that I said that you should not ignore other methodologies out there which may be appropriate for investing in technology stocks. Technology is the way of the future and you would be crazy not to consider them as investments for the future.
The next part of this series will focus on another important element of Buffett’s methodology - return on equity, and how it can be a powerful weapon for any investor. Keep an eye out for it!
