What it is:

Commonly referred to as The Oracle of Omaha because of his Nebraska roots, Warren Buffett is widely regarded as the world’s most prominent value investor.

How it works/Example:

Buffett caught the investing bug at the University of Nebraska, where he read Benjamin Graham’s The Intelligent Investor. Graham’s book advised investors to seek out stocks that trade far below their actual value, that deliver a margin of safety and that sell below their intrinsic value .

Buffett thoroughly researches businesses and buys them only at discounted prices. This practice, which was essentially invented and defined by Graham, gives him a so-called margin of safety on all of his investments. This margin of safety is the difference between a business’s intrinsic value and its share price.

Buffett invests in businesses with superior economic characteristics that are controlled by successful, skilled management teams. He also looks for companies with long histories of above-average earnings growth. And unlike many other investors, Buffett does not pay attention to stock market fluctuations, macroeconomics or  market  predictions. Instead, he merely sticks to his long-term investing plan. As long as a firm’s fundamentals do not change, Buffett will not sell — even in times of economic crisis.

Below are a few other characteristics that Buffett looks for when evaluating an investment opportunity.

Easy-to-Understand Businesses

One of Buffett’s principles is not unlike that of well-known investor Peter Lynch — stick with what you understand and choose investments  with which you are comfortable. Buffett, arguably one of the greatest and most revered stock-pickers of all time, says investors shouldn’t complicate things by seeking out complicated companies.

Along those lines, the world’s savviest investor has kept his holding company. Berkshire Hathaway, away from fast-growing technology stocks. Buffett admits that he just doesn’t understand technology well. As such, he avoids the industry altogether. Before investing in any business, Buffett attempts to predict what the company will look like 10 years in the future. High-tech markets change too fast to look that far ahead with any confidence.

High Return On Equity (ROE)

Buffett emphasizes return on equity (ROE). a key measure of a company’s profitability. He prefers to invest in companies in which he can confidently forecast future ROEs at least 10 years out. He is particularly fond of firms that don’t require a lot of capital. as they tend to produce much higher returns on equity .

Consistently Strong Free Cash Flow

Buffett also seeks companies with significant free cash flow. Always mindful of the risks associated with investing, he ensures that his companies have plenty of money left over to invest in their growth after they have paid the bills.