Should You Pick Stocks Like Warren Buffet Does?
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There are as many ways to invest as there are investors. Many of those ways can be very rewarding while some are not to profitable. Looking for that great way to invest can be very unsatisfying. In their frustration new investors think they should follow the advice of the financial gurus they see on TV. There are many but the most successful is Warren Buffet. He is so admired because he started with nothing and built Berkshire-Hathaway into a billion dollar company. His homespun ways and approach to investing draws many people to mimic his investing strategy.
If you study Warren Buffet you will see he has a 4 way approach to picking stocks to add to his portfolio.
1. His first criteria for picking a stock is the business must have a competitive advantage that separates it from other companies in the industry. It’s like a wall around a castle that protects the castle from invaders. This castle wall, a business must have, can be a distribution or supply system that that the company does better than other companies. It can also have a brand name that sets it above all others. This type of distinction is reflected in Buffet’s purchase of Coke-Cola. It’s a huge worldwide company that has all the distinctions that Buffet wants in a company.
When purchasing a company he asks himself if he spent $10 billion dollars could he build a company to rival Coke. The answer he got was, No! That made the company a buy.
2. His second criteria is the company cannot be a superficial fad company. It must be a company that has endured many years and will continue to endure. The product or service the company produces must be one that will continue to be useful for years to come. It must be something basic that people will need now and in the future. An example would be personal and home product needs that people use everyday. A tech company would not get on Buffet’s list because so much technology becomes obsolete so quickly. The tech company would have to have a product that is in daily use and will continually be a necessity of a persons life. Any product that can be outgrown or not be needed anymore would not qualify.
3. Buffet’s third criteria is it has to be a company you can explain. His old school view tells him that something complicated to him is too complicated to make work. Highly technical products or services, he stays away from. He likes basic products like paint companies and railroads. These hands on, basic, nuts and bolts companies have blessed him with many years of increased profits. His companies grow not by innovation but by just selling more of a product. Profits grow because the population grows. More and more people are buying paint and Coke thus producing rising revenues and profits. It’s a dead simple way to pick companies.
4. Buffet’s fourth criteria is related to business sectors. Is the company in a sector that has long-term favorable growth? Does it have the demographic trends to grow stronger and stronger. Sectors like home building have many companies that can have great growth potential. The food, transportation, and chemical sectors meet all of Warren Buffet’s criteria of good company growth.
Warren Buffet’s way to invest has been argued to be unsustainable. In a fast growing, worldwide economy his technique may not be transferable. But I look to his past success and believe he has much wisdom to offer. If you are listening to Buffet’s advice you could do much worse.
Category: Investing
