Warren Buffett

Business, Legal & Accounting Glossary

Definition: Warren Buffett


Warren Buffett

Quick Summary of Warren Buffett


The Chairman of Berkshire Hathaway, and arguably the greatest stock market investor of all time. An investor who chose to invest $10,000 in Berkshire Hathaway when Buffett took over in 1965 would have more than $20 million today. His forte is in identifying undervalued companies, and he is well-known for taking a very long-term positions in companies he identifies as being good investment prospects. Buffett provides strong evidence that it is possible to consistently outperform the market.




Full Definition of Warren Buffett


Warren Buffett was born in Omaha, Nebraska on August 30, 1930. Called “the Oracle of Omaha” for his uncanny ability to invest in undervalued companies, Warren Buffett took his holding company, Berkshire Hathaway, to near the top of the Fortune 500 list. Warren Buffett graduated in Economics from Columbia University, New York where he came under the tutelage of the legendary investor Benjamin Graham.

“Buffettology”, as the investment philosophy of Warren Buffett is called, goes beyond Graham’s value-investing by looking at the intrinsic value of a company as a whole for acquisition. Warren Buffett scouts for established companies that are grossly undervalued. Berkshire Hathaway, the flagship textile company Warren Buffett bought in 1962, provided the capital for his future acquisitions. Since then, Warren Buffett has diversified into a variety of companies such as American Express, Coca-Cola, and Gillette.

Here are the 12 tenets Hagstrom says for the basis for how Buffett decides which stocks or companies to buy.

Is the business simple and understandable?

Buffett will not invest in a business he can not understand, which is one of the reasons he avoided technology stocks even during the boom of the late 1990s. If you understand a business, you have a better chance of seeing opportunities and problems before they arise.

Does the company has a consistent operating history?

Although past performance is no guarantee of future results, it does show whether a business can operate in a variety of business conditions.

Does the business have favourable long-term prospects?

This may seem like a no-brainer, however, Buffett believes in holding good companies for the long term and that meant seeing a clear future. Companies that operated on trends, fads and technology that is out of date tomorrow didn’t fit his model regardless of how profitable they were in the short run.

Is the management rational?

Buffett places a great deal of importance on management and one of the areas he focuses on is how excess cash is used. If the company can generate above-average returns by reinvesting the cash in the business it should do so because this builds shareholder value. However, if not the management should return the cash to shareholders. In other words, the decision should be rational.

Is the management candid with shareholders?

Although strides have been made in opening company books, Buffett believes that many company executives still hide behind accounting conventions and don’t fully report to shareholders. He admires managers that admit mistakes and take responsibility for the company.

Does management resist the institutional imperative?

Buffett describes the institutional imperative as that need for managers to act and do like their peers no matter how irrational it may seem. Call it peer pressure for CEOs.

What is the return on equity?

Buffett focuses on return on equity rather than the more popular earnings metric in evaluating companies. His rationale is that earnings are fleeting and can be manipulated. Long term, return on equity will have a more profound effect on the company’s fortune than earnings.

What are the company’s owners earnings?

Buffett uses a rough calculation that replaces the traditional cash flow calculation to give him a clearer picture of company value. His calculation includes estimates of future capital expenditures, something missing in cash flow calculations.

What are the profit margins?

If a company can’t convert sales into profits, it has obviously failed. One of the ways this happens is to keep expenses to a minimum. Buffett avoids companies with bloated expenses because it reflects a lack of discipline even if the company is profitable – it would be more profitable if expenses were always controlled.

Has the company created at least one dollar of market value for every dollar retained?

Buffett notes that this is the test of correct capital allocation. Has the company correctly used capital to create market value (shareholder value) with cash it retained? If the company is holding on to cash, but not creating value for shareholders, what’s the point?

What is the value of the company?

Buffett says the value of a company is simply the total of the net cash flows (owner earnings) expected to occur over the life of the business, discounted by an appropriate interest rate. This model differs from most you’ll find because it depends on being able to predict earnings for the life of a company. Buffett says if you pick a company that has the attributes mentioned above, you can do this.

Can it be purchased at a significant discount on its value?

This is pure Buffett and where he gains his margin of safety. By buying at a discount, he knows that even if he is off somewhat of his evaluations, the discounted price will cover the difference. However, my guess is he doesn’t need that margin very often.


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/warren-buffett/
Modern Language Association (MLA):
Warren Buffett. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
March 28, 2024 https://payrollheaven.com/define/warren-buffett/.
Chicago Manual of Style (CMS):
Warren Buffett. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/warren-buffett/ (accessed: March 28, 2024).
American Psychological Association (APA):
Warren Buffett. PayrollHeaven.com. Retrieved March 28, 2024
, from PayrollHeaven.com website: https://payrollheaven.com/define/warren-buffett/

Definition Sources


Definitions for Warren Buffett are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 28th November, 2021 | 0 Views.