Business Perspective Investing

Warren Buffett is famous for investing in companies that makes economic sense from their business perspectives.

What is Business Perspective Investing?

In simplicity, Business Perspective Investing is the valuation of a business based on its reality and one can realize the return that is offered. This means that one can be certain of the investment’s annual rate of return.

Case Study: RJR Nabisco

In 1988, RJR Nabisco stock price was hammered by wall street due to fear of cancer lawsuits against its tobacco business. The stock price traded at $45.

The management understood the business of Nabisco better than Wall Street. They knew the returns potential of their company, and they took advantage of the low stock price by buying all the outstanding shares at $75/share.

Eventually, KKR bought RJR Nabisco at $123/share. This is because, KKR knew from a business perspective that RJR Nabisco’s cashflow supported the valuation of $123/share.

How to invest with a business perspective?

Like Warren Buffett, we should choose a company from a business perspective. This means choosing a company that you are confident in understanding its annual rate of return. For example, if you are confident that DISNEY would be able to constantly earn above $2/share and grow at 10% per year, then you can fix a price for Disney in 5 years at $70.

Fixing a forward price for stocks will be discussed in the near future.

From a business perspective, stocks like DISNEY, Microsoft, APPLE make good investments.

This is yet another BUFFETT’s trading strategy.