3 Financial Data Warren Buffett Looks Into Before Buying Into Companies

Don’t we all wish that we had a time machine, so we can go back to our past selves and tell him or her which stocks to buy for stock market investing? Anyone who’s seen the “Back to the Future” movies has probably fantasized about this at one time or another. But unfortunately, that technology has yet to be realized, and instead we must rely on what we have in the present to guide us in stock market investing.

There is one way we can look into the future – and it’s not magic! It’s something we can all have access to – a company’s past records. Financial data from the previous years can help us determine a company’s future. Common sense and history will tell us that if a company has been in great shape for a very long time, it most likely wil continue to grow in the future – that makes it a great value investment.

How much financial data does one need – apparently, as much as you can find. If a company, like McDonalds, has 69 years of records, then you better start reading up! Of course, there’s no need to look at every single year – in such a case, a ten-year summary would be enough.

Current data, stock prices and yes, even earnings, are not necessarily important when determining whether a stock is a good buy for long-term stock market investing.

Many industries have a poor record when it comes to long-term viability. Consumer electronics is one of them – in a world where your computer is obsolete the moment you purchase is, the same can me said of its stocks. Companies like Apple, HP, Samsung etc., are all about change – what’s new, what’s hot – and their billions in profits today may not be the same a decade from now.

Just looking at Apple’s past performance – shows a record of change and it seems the upturn only happened when Steve Jobs came into the picture. Are you willing to hedge your investment on the work of one man? Probably not.

Of course, it’s also important to look into the past with some discernment; not all past records can give you a look into the future. For example, media and publishing has been forever changed by the Internet, so perhaps investing in Newspapers, magazines, radio and TV is not the best idea – these industries are being affected by major changes, and may be volatile for the next couple of years.

Many people think investing maven Warren Buffet had some sort of crystal ball that looked into the future, and that he used future earnings to predict if a company was a good investment. Far from it – Buffet used data from the past, to help him get to know a company and used it to make his decisions. He relied on three things:

1. Cash flow data – how much money did a company have left over after paying its expenses? This meant that it had more resources to pour into delveloping new products, hiring more talented people and maintaining their business.

2. Return on invested capital – its gives you a view of how a company manages its resources to generate more income (and return)

3. Growth – was the business growing, on all levels, or was it deteriorating?

Warren Buffet didn’t have an exact formula – he had to look at the past financial data and made some adjustments, but, as a smart investor, he knew that these 3 things were important.

Buffet doesn’t give much importance on future earnings – for him, it’s only an insight into what the company’s management is thinking or the direction they’re taking the company to.

As written in the book, The Essays of Warren Buffett: Lessons for Investors and Managers, Buffet said in a letter to shareholders, “What counts for most people in investing is not how much they know, but rather how realistically they define what they don't know. An investor needs to do very few things right as long as he or she avoids big mistake.”

And perhaps there’s something we can all learn from his technique – that to see the future, one must look into the past – after all, he is the third richest man in the world with a successful value investing strategy.