Case study of investment criteria The World's Most Successful Investor:

Warren Buffett is the world's most successful investor and a self-made billionaire. He is consistently ranked among the world's Top 3 wealthiest people. Buffett runs and owns about 31% of Berkshire Hathway, a $136 billion investment company, that has substantial stakes in Coca Cola, Wells Fargo and American Express. A $1 investment in Berkshire in 1965 would bring about $5,500 in 2005. Since 1951, Buffett generated an average annual return of about 31%. The average annual return for the Standard & Poor's 500-stock over that period is 11%.

Warren Buffett's Investment Criteria:

Warren Buffett was once asked what is the most important thing he looks for when evaluating a company to invest in. Without hesitation, he replied, "Sustainable competitive advantage". Indeed, while business valuation matters, "it is the future growth and prosperity of the company underlying a stock, not its current price, that is most important. A company's prosperity, in turn, is driven by how powerful and enduring its competitive advantages are."2 Sustainable competitive advantage and market category leadership give a company the edge that keep competitors at bay and reap extraordinary growth and profits. Warren Buffett seeks to identify rare companies with strong competitive advantage that has a potential to grow even stronger over time. When a company is able to achieve this, its investors can be rewarded for decades. Often, investors in high-growth companies are disappointed not because the growth projections were terribly wrong, but because the implicit assumptions that the market is making about the sustainability of these companies' competitive advantages are wildly optimistic. Warren Buffett said it best in his Fortune article (November 1999): "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Corporate Investing:
Corporations are a major and rapidly growing source of funds for new ventures. Strategic benefits of corporate venture investing may include: Passion-driven: Discovery of unmet customer needs and unserved emerging markets. Potentially high return on investment. Supplements to internal research and product/service development investments. Improved efficiency of the value chain management, in particular supply chain and customer relationships. Development of new business relationships. Preparing potential candidates for strategic alliance or acquisition. Fear-driven: Reducing the risk of missing a new turn in technological development. Preventing competitors from acquiring a breakthrough technology.

Motivating internal talents to outperform outside ventures.

Using the Probability Theory:

Buffett is a master at the art of fast decision making and arbitrage. The probability theory is essential to Buffett's theory of investment: "Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That it what we're trying to do. It's imperfect, but that's what it is all about." Buffett uses essentially the same approach to investment strategy and arbitrage. In both cases "he buys into situations where the probability is that shares are undervalued and that this undervaluation will be corrected. The difference is time-scale; the arbitrage position will be closed out as soon as possible, while the investment will be kept "indefinitely so long as we expect the business to increase in intrinsic value as a satisfactory rate." That answers the question about how long Buffett believes a share should be held: possibly forever.

Relying On Gut Instinct:

Bill Gates, Founder of Microsoft Corporation and a Berkshire director, praises Buffett's hard-to-imitate management style. "It's baffling to think who else could do it," he says. Warren Buffet spends most of his day alone in an office with no computer. His desk isn't littered with stock research. "I don't use analysts or fortune tellers, " Buffett says. "If I had to pick one, I don't know which it would be." He deliberately keeps the outside world at bay, believing it is the best way for him to remain "rational" as an investor. If he is interested in investing in a company, he studies the financials himself. "All I have to do is think and not be influenced by others," he says. Warren Buffett "spends the better part of most workdays thinking and reading. He fields a handful of phone calls, and on most days, he confers with the chiefs of of a few Berkshire subsidiaries. He seldom holds meetings.

Making Fast Decisions:

Warren Buffett "makes swift investment decisions, steers clear of meetings and advisers, eschews set procedures and doesn't require frequent reports from managers. Occasionally he picks up the phone, calls his broker and trades $100 million or more of stock."1 When Buffett is buying stock, he pays little attention to some factors that shape other investors' decisions, such as economic climate. He doesn't wait to see what government is doing to make a trade. Buffet also can move more quickly than his competitors. He has no investment committee, and that allows him to make immediate decisions.

Hands-Off Management:
Buffett believes that managers of the companies he is investing in ought to be left to run their businesses without interference from him and without having to hew any to any unifying corporate strategies or goals. "We delegate to the point of abdication," Buffett says in Berkshire's Owner's Manual. Despite its investment size, Berkshire Hathways has a tiny staff. It's headquarters is staffed by just 17 employees. The company has no public-relations, human-relations, investorrelations, legal departments, or investment committee. It holds no quarterly earning calls for investors and analysts, has no asset allocation guidelines, and gives no guidance on future earnings. Warren Buffet tells the chiefs of his business units not to produce any special reports for him.