Value Your Business: Warren Buffett Style

Known as the "Oracle of Omaha," Warren Buffett is one of the most successful investors in history. He leads Berkshire Hathaway, a conglomerate that owns a diverse range of companies, including Geico, Duracell, and Dairy Queen.

Buffett, the son of a U.S. congressman, displayed an early interest in business and finance, buying his first stock at age 11 and filing taxes at age 13. Throughout his career, he has built a reputation for his investment acumen and commitment to philanthropy.

Buffett has pledged to donate over 99% of his wealth and has already contributed more than $56 billion, primarily through the Gates Foundation and his children's foundations. In 2010, he and Bill Gates launched the Giving Pledge, encouraging billionaires to donate at least half of their fortunes to charitable causes.

Business Quote

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful." - Warren Buffett

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Buffett's Business Lesson: Focus on what matters and value a business

Benjamin Graham, a mentor to Warren Buffett, once said, "In the short run, the market acts as a voting machine; in the long run, it becomes a weighing machine." This means that while short-term market movements can be erratic and influenced by investor sentiment, the true value of a business is revealed over time.

Berkshire Hathaway's financial results in recent years illustrate this principle. In 2022, Berkshire reported a significant loss due to accounting rules requiring it to count gains and losses from its investment portfolio as part of its earnings. The market downturn that year led to lower reported earnings. Conversely, in 2023, a soaring stock market resulted in higher reported earnings per share. However, the more telling measure of Berkshire's performance, operating earnings per share— which exclude the distortions from short-term market fluctuations—increased by 23% from 2022 to 2023. This reflects the company's true earnings power more accurately.

Long-term investment results from Berkshire's extensive stock portfolio are substantial, but it is unwise to base the company's valuation on short-term stock market volatility. Graham taught Buffett to analyze stocks as businesses and to ignore short-term price fluctuations. This approach, refined with Charlie Munger's influence, evolved from buying fair businesses at wonderful prices to acquiring wonderful businesses at fair prices.

Despite these refinements, the principles in chapters eight and twenty of Graham’s book, "The Intelligent Investor," remain central to Buffett's investment strategy. Graham believed investors should view stock holdings as ownership in a business, much like being a silent partner in a private company. Stocks should be valued based on the company's intrinsic value, not the constantly changing market price. Investors should take advantage of the market's erratic view rather than letting it dictate their actions.

Valuing stocks as businesses and purchasing them with a "margin of safety" allows investors to ignore market volatility. For Graham, the "margin of safety" meant buying at a price below the indicated or appraised value, ensuring a reasonable return even if there are errors in the analysis.

Book Recommendation

Read more on Buffett's investment strategy, The Intelligent Investor written by Benjamin Graham. 

Podcast Spotlight

Make sure to visit www.enterprisehoney.com to learn more about our upcoming podcast episodes with Zach Chirico, the CEO of Aurio!

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