Warren Buffett is one of the most successful and respected investors of all time. He is the chairman and CEO of Berkshire Hathaway, a conglomerate that owns and invests in various businesses across different industries. He is also known for his value investing philosophy, which involves buying high-quality companies at reasonable prices and holding them for the long term¹.
Buffett’s stock selection process is based on several criteria that he looks for in a potential investment¹²:
– A strong and durable competitive advantage that protects the company from rivals and allows it to earn high returns on capital.
– A capable and honest management team that acts in the best interest of shareholders and allocates capital wisely.
– A consistent and growing earnings power that reflects the company’s ability to generate cash flows and reinvest them for future growth.
– A reasonable valuation that offers a margin of safety and an attractive return potential.
Buffett also follows some general principles that guide his investing decisions²³:
– He analyzes a stock as a business, not as a piece of paper, and focuses on its fundamentals, not its price movements.
– He demands a high-quality business with a simple and understandable business model, preferably within his circle of competence.
– He prefers companies that have a loyal customer base, a strong brand, a low-cost structure, or a network effect that gives them an edge over competitors.
– He avoids companies that have too much debt, too much competition, or too much dependence on external factors such as commodity prices or regulations.
– He seeks companies that have a long-term vision and a purpose beyond profits, such as creating value for society or solving problems for customers.
– He is patient and disciplined, and waits for the right opportunity to buy a great company at a fair price or a fair company at a great price.
– He is not influenced by market fluctuations or popular opinions, but rather by his own research and judgment.
Some examples of companies that Buffett has invested in using his stock selection process include Apple, Coca-Cola, American Express, Bank of America, and Costco¹. These are companies that have dominant positions in their industries, loyal customers, strong brands, high returns on capital, and consistent earnings growth¹.
I hope this helps you understand Warren Buffett’s stock selection process. If you want to learn more about his approach and philosophy, I recommend reading his annual letters to shareholders¹ or his biography The Snowball³.
(1) How Does Warren Buffett Choose His Stocks? – Investopedia. https://www.investopedia.com/ask/answers/081114/how-does-warren-buffett-choose-what-companies-buy.asp.
(2) A Stock Picking Strategy Derived From Warren Buffett – Forbes. https://www.forbes.com/sites/investor/2023/05/11/a-stock-picking-strategy-derived-from-warren-buffett/.
(3) How To Screen For Stocks Using 12 Buffett Investing Fundamentals – Forbes. https://www.forbes.com/sites/investor/2020/08/07/how-to-screen-for-stocks-using-12-buffett-investing-fundamentals/.