The following are what we consider to be the five main keys to Buffett’s methods of investing.

• Businesses that you understand: Focus on areas that you have the most background in or the most interest in. Buffett, for example, does not invest in tech companies because he says that he does not understand the market for their product or service. He focuses on ‘consumer’ foods, newspapers, insurance companies and retail furniture stores.

• Strong economic moat: Look for companies that have a protection against their competitors. This could be geographical, patents, brand name, entry costs, and so on. When companies have a strong economic moat, then financial forecasts can be more reliable. An example is Westfield Holdings. When they build a new shopping centre, particularly in outer suburban areas, then it is unlikely that another centre will be built nearby.

• Sales and earnings growth: You can still get good returns from companies that have poor growth figures if they pay out most of their earnings as dividends or use them for share buybacks. Nevertheless, at least a reasonable level of growth is often important for the management and employees to have a sense of achievement which then translates into higher productivity and less unrest. I also look for companies with earnings that have a high stability of sales and earnings growth.

• Return on equity: If you think of equity as your money, then return on equity is a measure of how well management is doing with your money. It is virtually impossible for a medium to long-term investment to be satisfactory if the return on equity is low. Look for companies that have 15% or more return on equity and return on capital.

• Not too much debt: If debt is too high, then the company is vulnerable to credit squeezes and may have difficulty in raising money for expansion.

Using keys such as these, Buffett is looking for what we call ‘great companies’. These are companies that have done well in the past and have all the hallmarks of doing well in the future.

Another important aspect of Buffett’s approach is that he buys stocks as if he were holding them for a life time – a bit like getting married. When you pop the question, your intention is that it is going to be forever It might not end up that way, but this is what guides your decision.

On a number of occasions Buffett has referred to himself as a ‘Rip Van Winkle’ investor, an investor whose ‘favourite time frame for holding a stock is forever’.

The final stocks are those with characteristics like those described above: high return on equity and return on capital, low debt, healthy capital structure, and stable strong growing earnings and sales. These are quality businesses that are potentially great investments, so long as they can be purchased at a reasonable price.

These stocks are then analysed in more detail using proprietary analysis and graphing tools to calculate their return under different ‘margins of safety’.