In the world of Investing, few can match the success of Mr. Warren Buffett. He has compounded an original investment of around $100,000 to more than US$30 Billion dollars today. Shares in his company, Berkshire Hathaway Inc., have compounded at an average annual rate of 23% per year for the last 30 years. Dubbed the "World's Greatest Investor,"

Mr. Buffett would insist that his success is easy enough to duplicate. Mr. Buffett's recipe is based on a business owner-like focus. He considers business owners to be the most capable investors because they are making capital allocation decisions on a daily basis. Although Mr. Buffett is very modest in estimating his own abilities, his recipe really is quite simple. It goes like this.

Completely Understand: To become an owner of a business we don't understand is tantamount to speculating because a successful outcome will depend on chance. We consider a business as though we are buying the entire operation and we look at the business independently of the price. We want to allocate capital sparingly, as though there are only a limited number of opportunities to choose from in our lifetime. It's okay to miss 100% of the shots we don't take because we are extremely risk adverse and prefer to take only the perfect opportunities. We are rewarded with a stable of excellent businesses that gush earnings like Old Faithful, the geyser, time and time again. This allows us to sleep at night.

Demonstrated History of Shareholder Earnings: The previous earnings history tells us how much money we could have disgorged from the business had we owned it in the past. It's the free cash flow of the business that we are purchasing when we buy the stock. We favor the certainty of reliable income streams over the speculation of short-term price movement. We derive a greater pleasure from owning a business with a history of steadily increasing earnings. Start-up operations have no track record, so, we would be uncomfortable as owners. We like a business that can retain and compound earnings into the indefinite future. Where appropriate, we like retained earnings to be used for retiring shares, adding value for the remaining shareholders.

Part of a Long Term Growth Industry: In a rising tide even the leaky boats will come up together. Over time, the ebbs and flows of money in and out of our businesses will float the share prices, based on the expectation of future profits. Projections of long term earnings growth (five years or more) are more credible when the business is part of a reliable trend indicating a rising tide.

Run by Honest and Competent People: A business is only as good as the people running it. We like the assurance that comes from having some of the greatest business minds in the world running our companies. We don't expect to be telling the batter how to stand while he or she is in the batter's box.

Strong Franchise Appeal: A commodity based business is easily recognized by its reinvention dependency cycle. Since cost is the only determining factor in the purchase of a commodity, efforts are constantly underway to reduce the cost of production allowing prices to be discounted and market share to be won. This cycle of reinvention is expensive. Typically the competition is undergoing the same transformations, leap frogging each other, always at the expense of profits. As an alternative, we favor businesses with strong curb appeal or brand name recognition. The attraction is the added value allowing the franchise to charge a premium for its products or services. Premiums go right into profits, in direct contrast to the commodities based business where discount pricing and the cost of reinvention cut into profits. Barriers to entry are like a moat around the business and, through industry dominance, they are able to achieve price flexibility. When it comes to investing, we employ the strategy of the biblical David and the strength of Goliath.

Buy Below Intrinsic Value: A margin of safety against adverse price fluctuations is built in when we buy our businesses at a discount to their true value. Benjamin Graham established the objective discipline of value investing. Graham was a mentor to Buffett, first as a teacher then as an employer. Graham's recipe calls for value to be established based on the "here and now". Buffett reasoned that the future earnings were the object of desire, so value should be determined by the discounted value of the future earnings.

Long Term Ownership: Compounding is the essence of Wealth Creation. The component drivers of compounding are the 3T's; Time, Taxes and Total Rate of Return. Time is the principle agent, or the engine of growth, and its contribution increases exponentially with each incremental unit of time. The longer we own our businesses without selling, the longer capital gains taxes are deferred. The longer taxes are deferred, the longer the compounding base remains intact.

Preservation of investment capital is also why so many successful business owners are multi-generational. It's quite common for business owners to remain focused on their business and never even think about selling. If we want the kind of wealth that is attributed to the ownership of an excellent business, we must conduct ourselves accordingly. Buffett's favorite holding period is infinity.