This post is based on Valuewallk’s ‘Warren Buffett On Lou Simpson and His Successful Investing Strategy’.
Lou Simpson has been working as a chief investment officer for Keiko, a subsidiary of Berkshire Hathaway of Warren Buffett, for several decades. His investment principles are already well known among many value investors.
Lou Simpson is a vigorous reader who searches daily for newspapers, magazines, annual reports and newsletters to find clues that can spur investment ideas.
Let’s look at the five investment principles of Lou Simpson for value investment. This is what Lou Simpson told Valuewalk in his interview.
1. Think independently.
We strive to doubt traditional wisdom and avoid waves of irrational behavior and emotions that periodically swallow Wall Street.
We also do not ignore unpopular companies. Sometimes unpopular companies offer us the greatest profit.
2. Invest in profitable companies that operate for shareholders.
The long-term rise in share prices is most directly related to the profits the company earns in return for shareholder investment. Sometimes the profits reported in numbers can be manipulated.
Therefore, looking at the cash flow is a good measure of whether the reported profit is manipulated. We evaluate management through the following questions:
“Do management have a significant stake in the company’s stock?”
“Are you honest in your relationship with the owner?”
“Do management have a willingness to eliminate unprofitable businesses?”
“Do executives use excess cash to buy treasury stock?”
Occasionally, executives running profitable businesses often use excess cash to expand into less profitable businesses. But even in this case, buying treasury shares is a much better way to use surplus resources.
3. Pay only reasonable prices, no matter how good the business is.
Even companies that have the best and most profitable business in the world can not be a good investment if they invest at too high a price.
4. Invest long-term.
Attempts to guess short-term fluctuations in individual stocks, stock markets, or the economy have never produced good results.
5. Do not invest in overly dispersed stocks.
Distributing more does not mean better achievement. you just get average results. We focus on a few companies that meet our investment criteria.
A good investment idea, a company that meets our standards, is very difficult to find. So we invest a lot when we think we have found a company that meets our standards.
More than 50% of GEICO’s portfolio is comprised of five stocks.
It is impossible for a person who can not withstand even a small wave to endure a bigger wave. The investment principles of an excellent investor can be a good guide for us.
The important thing is to understand and apply their principles properly. Warren Buffett said. When you decide to buy a stock, think of it as “using a toll card that only punches a hole 20 times in your life”. When you decide to invest in any stock, it means you have to think very carefully and approach it.