WARREN BUFFETT'S INVESTMENT PRINCIPLES

 1. The company should be soundly managed. Tests of good management include:

• Share buybacks: Has the company been buying back its shares, and if so, has it bought them responsibly?
• Good use of retained earnings: Has management wisely used retained earnings to increase the rate of return to shareholders?
• Sticking to what you know: Does the company invest in and operate businesses within its area of expertise?

2. The company has demonstrated earning capacity with a likelihood that this will continue. Tests of earning capacity include:

• Company growth: Have the earnings per share and sales per share of the company shown consistent growth above market averages over a period of at least five years?
• Dealing with inflation: Does the company have the ability to maintain or increase profitability by raising prices?
• Capital expenditure: Is the company going to regularly require large capital sums to ensure continuing profitability?
• Brand names: Does the company sell brand name products that are likely to endure?

3. The company should have consistently high returns. Warren Buffett would look at both:

• Returns on equity
• Returns on capital

4. The company should have a prudent approach to debt: Is the company, looking at both long-term debt, and the current position, conservatively financed?

5. The businesses of the company should be simple and the investor should have an understanding of the company: Is the business of the company easily understood?