Warren Buffet's Investment Principles in a Nutshell

Most of us know who Warren Buffett is but all of us don't know what his investment philosophy is. His investment philosophy has been seen as closely guarded secret and many people have been trying to decipher how the world's greatest investor has been able to compound his investments for more than 20% annually for over 40 years.

Perhaps his philosophy is not so much so 'guarded' as it is fluid, being changeable most of the time to adapt to the evolving investment world. There are some core principles that he stands by in looking out for good investments which we all can learn from. Though the exact method in determining what is labeled as a good investment or not is not reveal, these core investment principles will allow us to follow Buffet to a certain extent on what he looks out for when buying a company.

1. Predictable Future Earnings
The key concept here is "the trend of increasing and stable earnings". All past (and hopefully future) earnings ought to follow a straight upward pattern to warrant a consideration for investment. Such a trend indicates growth and sustainability of the company. Do note that the earnings trend is not affected by periods of recession, it is a great indication of the company's ability to weather downturns and sustain its product line, hence generating returns for the investor. While the share price might drop due to downturns but in the face of increasing earnings, it ought to be seen as a good time to buy into the company. Key numerical indicators to follow are PE (price to earnings) ratio, PEG (price-to-earnings growth) ratio, adjusted profit and gross margins, and ROE (return on equity).