Warren Buffett is a well-known investor who has built an impressive track record and fortune through his holding company, Berkshire Hathaway. Buffett believes in investing in successful companies that are growing at a price that makes economic sense, as the value of the investment will grow along with the business. His approach can be learned through his writings and explanations of holdings in the Berkshire Hathaway annual reports. This strategy has proven successful, with AAII building a stock screen based on Buffett’s strategy, which has gained 11.3% on average since inception in 1998.
Buffett’s investing approach focuses on identifying excellent businesses and acquiring them at the right price. He categorizes businesses into commodity-based firms, which he typically avoids, and consumer monopolies, which he prefers. Consumer monopolies sell products or services that are unique and difficult to reproduce by competitors, leading to brand loyalty and high profits. Buffett looks for specific characteristics when identifying commodity-based companies, such as low profit margins and the absence of brand-name loyalty.
To determine the attractiveness of a business, investors should consider if it is a consumer monopoly or commodity, if it is conservatively financed, if earnings are strong and show an upward trend, if the company sticks with what it knows, if it has been buying back its shares, and if retained earnings have been invested well. Buffett also considers if the company’s return on equity is above average, if it can adjust prices to inflation, and if it needs to constantly reinvest in capital. The price an investor pays for a stock will determine the rate of return, with Buffett aiming to buy excellent businesses at attractive prices.
Buffett’s historical earnings growth approach involves projecting the annual compound rate of return based on historical earnings per share increases. He requires a return of at least 15% and the approach has been successful in identifying stocks with potential for high returns. Buffett’s overall approach involves identifying excellent businesses with strong growth prospects and waiting for attractive share prices. This approach combines discipline in identifying quality businesses and waiting for market opportunities to buy at favorable prices.
It is important for investors to perform due diligence and understand the criteria before investing based on Buffett’s approach. While the stocks meeting the criteria do not represent a recommended buy list, following Buffett’s investing principles has shown success in selecting companies with growth potential and attractive long-term returns. Buffett’s approach emphasizes the importance of investing in excellent businesses at the right price to achieve optimal returns and capitalize on market opportunities.
