Originally Posted by
Sauce
Snoopy Here is my (probably totally off the mark) own view on Buffetts methods ( in very general, simple terms )
Also you have to imagine you are Warren for this example, as it sounds easy, and probably is fairly easy now for Warren, but without his lifetime of experience and intelligence I think its very difficult:
Qualitative:
1. Does the business have a durable competitive advantage
2. Is it extremely improbable that something external (new technology etc) could derail the business
3. Are management extremely talented and honest
Quantitative:
4. Has the business been able to invest its retained earnings at returns well above the cost of capital ?
5. How much do I have to pay for equity in the business at prevailing prices?
6. Does a margin of safety exist?
(obviously actual work of assessing margins, debt levels, adjusting asset values to get true equity etc - who knows there could be all sorts of work that MIGHT go in, but this is my view on the points critical for valuation, if we were to put ourselves in Warren E. Buffetts shoes)
Now if you are Warren E. Buffett and you have answered yes to questions 1 - 3, then the balance of probability says that great business economics, if they exist, are highly likely to continue into the future. Therefore questions 4 - 6 require only basic maths, rather than a complex forecasting model.