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In the business world, what works once may not at other times. For example, the Reliance Power IPO issue, which was over-subscribed many times over, three weeks later, had a poor opening. This is not peculiar only to the stock market. The same is the case with businesses all over.
But it would be worthwhile for us to understand the fundamentals, which would enable us to evaluate the parameters affecting decisions, before the decisions are made or sought to be made.
In this context, Buffet's way of purchasing businesses / investing would throw light on the basic principles he followed.
Business Tenets
Management Tenets
Financial Tenets
Market Tenets
Business Tenets
Before one invests in a company or intends to purchase a company, one has to ensure that the business is simple and understandable. A decision based on a sector being a "hot" sector and everybody talking about it, is not a sound judgment. A business should have consistent operating history. Its performance over the years needs to be evaluated. While good performance in the past does not guarantee its future, the study would throw light on certain important aspects, chiefly the way a business is being conducted and whether it would have favorable long-term prospects. An investor's financial success directly depends on the degree of understanding of the investment. Buffet ensures that he is aware of the operation of the business, the revenues, expenses, cash flow, labor relations, pricing flexibility and capital-allocation needs. Hence, investment success is not a matter of how much you know but how realistically you define what you do not know.
The following are worth taking note: -
An investor needs to do very few things right as long as he/she avoids big mistakes.
Above-average results are often produced by ordinary things done exceptionally well.
Best returns are achieved by companies that have been producing the same product or service for several years.
Undergoing major business changes increases the likelihood of committing major business errors.
Severe change and exceptional returns usually don't mix.
"Turn-arounds" seldom turn.
Energy can be more profitably expended by purchasing good businesses at reasonable prices than difficult businesses at cheaper prices.
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* Contributed by: -
Gomathi Krishnamurthy is B.A. and L.L.B., and holds PGDBM (Finance) qualifications from BIM, Bangalore (Batch of 2006). Has 10 years experience in various departments of Indian Railways, and is currently working as Consultant - LEGAL with Ma Foi Management Consultants Limited.
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