Decoding a genius

Next year, Warren Buffett, the legendary investor who ranked third on Forbes' 2010 list of the world's richest men, comes to India. Though this is Buffett's first visit to India, he will be pleasantly surprised by the adulation that he commands in the country. Thousands of stock market investors pay daily homage to his genius by eschewing the fads of the day - day trading, technical analysis, etc. - and sticking to the time-tested value-investing approach of which Buffett is the finest apostle (if we take Benjamin Graham, his guru, to be the original prophet of this cult). However, one fears that in the midst of the media hoopla that will inevitably accompany Buffett's visit, the real significance of what he represents will get lost. And that is: we do not need to condemn ourselves to mediocre performance in the markets. We do not even need to be content with middling results as one could get by investing in index funds. Even without his obvious genius we can produce market-beating results, provided we take time out to study his methods, and then display the discipline required in their application. What follows is a curtain-raiser on Buffett's investment methods. A business-like approach Robert Hagstrom, author of The Warren Buffett Way, says that the first thing to understand about Buffett's approach to investing is that whether he intends to purchase a company's stocks or the entire company, he always behaves more as a business analyst rather than as an investment analyst. He examines a company on four parameters: its business, its management, its finances, and finally, its valuation. EVALUATING THE BUSINESS Understanding the fundamentals of the business, Buffett believes, is important because it gives you confidence in your investment decisions. You are then unlikely to get scared into selling your stocks if for some reason their prices plummet after your purchase. While evaluating a business, Buffett applies three criteria: Simple business. If your research leads to the conclusion that the business has great prospects, you will be able to say so with greater confidence in the case of a simple business than in the case of a complex one. Take the examples of some of Buffett's major investments. Coca Cola is a great business because of its brand strength and its worldwide distribution network. Washington Post, the newspaper, is another business that he understands very well from having owned another newspaper earlier. Wells Fargo, the bank, is also a simple business: make intelligent loans so that non-performing assets remain low, and keep a tight rein on cost of operation. Says Veer Sardesai, a Pune-based financial planner who is an avowed practitioner of the Buffett school of investing: “Do not invest in the next new idea if you do not understand it. Buffett practised what he preached by staying away from dotcom stocks in the late nineties.” Consistent operating history. Buffett likes to invest in businesses that have remained the same for decades. He says: “Severe change and exceptional returns don't mix.” Coca Cola, Gillette, etc are all busin