The devotees of legendary American investor Warren Buffett are numerous and his way of investing has been copied by many, including Conscious Investing’s John price. A good low stress starting point, Price says, is to identify companies with business that appeal to you. But once you have applied this filter, it becomes more technical. An investment valuation indicator you may then consider is return on equity. People these days, particularly owners of metropolitan property investments, understand the concept of equity. It is the value of your investment after you have subtracted any debt that you owe (generally the mortgage). The equity concept is the same in public companies.

If a company is making a 2 to 3 per cent return on equity, then over the medium to long term this is what you will make as an investor, he says.

However, over the longer term, the major determinant of returns is the profit a company earns. From profits come dividends, after all.

Price says some investing strategies try to capitalise on fluctuations in share price. But fluctuations are hard to predict and require courage and investment capital that you can afford to lose if the strategy does not work.

The core of the Buffett style is to put together a portfolio of companies where you understand what the business does and are happy with the product or services it offers.

If you also see the shares delivering a good and consistent return on equity over time, then that will flow through into the share price and you will be ahppy with your share portfolio. A desirable return on equity is at least 10 per cent and preferably 15 per cent, not just in the most recent years but also the last three to four years.

The Conscious Investing service scans every share in the Australian market and identifies those that fit a Buffett strategy. The ideal scenario is to develop a portfolio of shares in companies that have consistent earnings over the medium to long term. This contrasts with investing in shares that are high on promises but have little or no earnings. Investing in such a company would be described as speculating, Price says, noting that Buffett was conspicuous by his absence in the United States dotcom sharemarket boom of the late 1990s.

John Price is CEO of Conscious Investing. Email johnprice@conscious-investor.com.