In the early part of his career, Warren Buffett (Trades, Portfolio) followed an investment strategy laid out by Benjamin Graham called deep value investing.
The strategy was, in many ways, a quantitative strategy. It was based entirely on a company's fundamentals and ratios, and any company that looked cheap enough would be included in Graham and the Buffett's portfolio. Because this was a relatively imprecise strategy, Graham advocated having more than 30 stocks in a portfolio at any one time so that if one stock went to zero, there would be plenty of other equities left to take over.
It's all about the business
Buffett used the same approach for decades but then began to change when he met Charlie Munger (Trades, Portfolio) who convinced him that buying quality at a good price was more important than buying cheap.
Today, he is less focused on the numbers and more focused on the quality of management and the business overall. In fact, he said that he never buys anything "just by the numbers" today.
Buffett made this statement at the 2013 annual meeting of Berkshire Hathaway shareholders in a response to a stockholder who asked, "What's your top five quantitative metrics that you've looked at, and what's your preferred number for each metric?"
Buffett responded by saying that whenever he looks at a business, he's looking at both quantitative and qualitative metrics because he's not just looking at the stock, he's looking at all aspects of the business:
"It's very important to have that mindset, that we are buying businesses, whether we’re buying 100 shares of something or whether we’re buying the entire company. We always think of them as businesses.
So when Charlie and I leaf through Value Line or look at annual reports that come across our desk or read the paper, whatever it may be, that, for one thing, we have a — we do have this cumulative knowledge of a good many industries and a good many companies, not all by a long shot.
And different numbers are of different importance -- or various numbers are of different importance -- depending on the kind of business."
No short cut
This isn't something you learn overnight and there isn't a shortcut to understanding all the various different aspects of businesses across sectors.
In fact, as Buffett went on to say, his knowledge on the topic has been accumulated over several decades of reading and trying to understand businesses in many different sectors. Although, he also noted that both he and Munger quickly establish that there were certain sectors that they would never be able to understand, so haven't tried -- this is what Buffett commonly referred to as "outside his circle of competence."
An example the Oracle of Omaha gave of this process in action was his idea to buy Bank of America preferred stock. He said the roots of this idea were originally planted more than five decades before the financial crisis:
"The truth is, I read a book more than 50 years ago called 'Biography of a Bank.' It was a great book, about A.P. Giannini and the history of the bank. And I have followed Bank of America, and I followed other banks, for you know, for 50 years.
Charlie and I have bought banks. We used to travel around Chicago trying to buy more banks in the late 1960s. And so, we have certain things we think about, terms of a bank, that are different than we think about when we are buying other stocks. And so there is no one-size-fits-all."
Buffett concluded that he never approaches a company because he has been able to calculate some precise price-earnings ratio or price-book ratio or "whatever it might be." Instead, he buys when he has some idea of what the business might look like in five or 10 years and has "a reasonable amount of confidence in that judgment, and there's a disparity in price and value, and it's big."
Disclosure: The author owns shares in Berkshire Hathaway.
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