Warren Buffett is one of the most successful stock market investors of the past 30 years. His entire approach is to focus on the value of the business and its market price. THE BUFFETT APPROACH TO INVESTMENT: Never follow the day to day fluctuations of the stock market. -The market only exists to make it easier to buy and sell, not to set values. -Keep an eye on the market only for someone who is willing to sell a stock at a not-to-be-missed price. A stock market exists simply to facilitate the buying and selling of shares, therefore TARC should not too concentrate on the stock market if decide to purchase the shares of AVB as TARC believe that the company has sound financial prospects and intend owning it for a number of years, what happens in the market on a day to day basis is totally inconsequential.
Don't try and analyze or worry about the general economy
-If you can't predict what the stock market will do from day to day, how can you reliably predict the fate of the economy?
TARC should proceed with the acquisition of AVB if it has a realistic opportunity to progress regardless of whether the overall economy is expanding or contracting because a business which has the ability to profit in any economic environment is very valuable rather than begin with an economic assumption about the direction of the economy and select only stocks which fit the model as it is impossible to predict what the stock market will do from day to day, how can it be even remotely achievable to forecast what the economy as a whole will do in the next few years,.
Buy a business, not its stock.
-Treat a stock purchase as if you were buying the entire business, using the following tennets:
Business Tennets
Is the business simple and understandable from your perspective as an investor? ( TARC should purchase the shares of AVB if AVB is within their own circle of financial and intellectual understanding, for instance, if TARC understand how does AVB operates like how does it generates sales and what expenses will be incurred, TARC should go ahead with the acquisition of AVB)
2. Does the business have a consistent operating history? (As the best level of profits over the long-term are achieved by companies that have been producing the same product or service for a number of years, therefore TARC should review the background of AVB in order to understand the operating history of AVB and if it has consistent operating history, TARC should acquire AVB)
3. Does the business have favourable long-term prospects? (TARC should evaluate whether AVB can sustain in long term or not, for example if AVB can sustain in long term because of it has lower cost supplier, then TARC should purchase AVB)
Management Tennets
1. Is management rational? ( TARC should look at whether the management of AVB will act in the best interest of the owner like appropriate allocate the excess capital, such as invest in the projects which give higher return to the company, if the management does so, TARC should acquire AVB)
2. Is management candid with its shareholders?(If the manager of AVB sincerely in disclose the financial performance and dare to admit mistakes and report the progress of all aspect of the company, TARC should proceed with the acquisition)
Financial Tennets
1. Focus on return on equity, not earnings per share. (TARC should evaluate the return of equity of AVB as it is the best measure of the performance of a company as it measure the ability of management to generate a return on operations of the business given the capital employed, if return of equity is good, then the acquisition of AVB is feasible)
2. Calculate "Owner Earnings". ("Owner earnings'' is calculated by adding depreciation, depletion and amortization charges to net income and subtracting the capital expenditure required to maintain economic position and unit volume. It is important for TARC to know the "owner earning" of AVB because it reflects the true cash flow position of a company)
3. Search for companies with high profit margins. ( A company with high profit margins reflect its management are well manage the cost of the company, if AVB have high profits margins, TARC should buy AVB)
4. For every dollar of retained earnings, has the company created at least one dollar's extra market value? (A well-managed company will add at least one dollar of market value for every dollar of retained earnings, thus if AVB has done so, TARC should buy AVB)
Management Tennets
1. What is the value of the business? (Buffett calculates the value of a business as the net cash flows expected to occur over the life of the business discounted at an appropriate interest rate. Net cash flows are the company's owner earnings over a long period. Something like the thirty-year U.treasury bond rate can be used as a measure of the interest rate for this calculation. By calculating the business value this way, vastly different business enterprises can realistically be compared. Hence, by calculate the value of AVB, it can be used to compared with other company to evaluate whether AVB is perform well than other company, if AVB is perform well, TARC should buy AVB)
2. Can the business currently be purchased at a significant discount to its value? (The intention of any investor is to earn above-average returns. The difference between business value and price is the investor's margin of safety.
Buffet generally aims for a 25-percent discount as his margin of safety. Therefore TARC may try to negotiate with AVB in order to purchase the shares at margin of safety of 25%)
. Manage a portfolio of businesses.
-Intelligent investing means having the priorities of a business owner (focused on long-term value) rather than a stock trader (focused on short-term gains and losses).
(Diversification is only required when an investor does not know what they are doing. TARC should buy AVB only if it know the operating fundamentals of AVB)
