He founder of Berkshire HathawayWarren Buffettis one of the legendary investors in the market. He himself has managed to make a great name for himself and the success of his investments is proof of this. The Oracle of Omaha has revealed in a letter to shareholders in 2013 the test that is carried out on every company before investingr. It consists of two partswhich must be met before deciding to open positions according to Keith Speights en Yahoo Finance.
Buffett first determines whether he can “sensible estimate a range of earnings for the next five years or more”. The key word here is “sensibly.” It doesn’t pull numbers out of thin air, but rather thoroughly analyzes a company’s business along with industry trends to make the best possible earnings estimate.
Please note that five years is a minimum estimation period. Buffett wants to avoid investing in a business that could temporarily generate strong earnings growth only to have that growth quickly evaporate. In his letter to Berkshire shareholders, Buffett wrote that if he can’t estimate future earnings, he moves on to the next stock.
Buffett’s second step is to buy a stock only if it is trading at “a reasonable price” relative to the lower end of your estimated earnings range. Buffett will buy stocks only if they are reasonably valued using this approach. Again, if the stock doesn’t pass this second step, move on.
This two-step test used by Buffett may seem simple. However, it is harder to follow than you might think.
On the one hand, “sensiblely” estimating a company’s earnings over five years or more can be a challenge. If you’ve ever wondered why Buffett didn’t invest in Apple or Amazon sooner than he did (or never bought stocks like Nvidia that turned out to be big winners), it’s because he couldn’t project their future earnings with enough confidence.
In his 2013 shareholder letter, Buffett explained that he needed to recognize “the perimeter of our circle of competence and staying within it. He knew (and still knows) how important it is to understand a business and an industry to estimate profits.
It is also difficult in some market environments to find stocks valued attractively enough to pass the Buffett test. That has clearly been the case in recent quarters. Otherwise, you can bet that Buffett would have bought more shares instead of accumulating a cash reserve of more than $325 billion for Berkshire.
Berkshire Hathaway It closed higher last week at $681,460. The 70-period moving average is above the last 15 candles, RSI is up at 44 points and the MACD lines are below the zero level.
Medium-term resistance is at $737,000. Meanwhile, Ei indicators are mixed.