Investing Like Warren Buffett

Warren Buffett

Warren Buffett is widely considered the best stock investor in history.  He is a billionaire today in part because he invests in the stocks of companies for the long-term.  He holds many stocks such as Coca Cola, American Express, The Washington Post, Proctor & Gamble, and others that he bought back in the 1960s, 1970s, and 1980s.
Just investing in his company, Berkshire Hathaway, would have made you wealthy.  In 1980, ten shares would have cost you $3,400.  Today those 10 shares are worth  over $1,700,000 a share!

In our next post we will continue with this long-term investing theme, and discuss how to find great stocks.  But for now start to think about trying to become an investor like Buffett……

On Wednesday I started a series on long-term stock investing. Today I would like to talk about finding those top stocks that outperform the market by a factor of 10 to 100.

Of course, it is not easy to find these mega winning stocks.  And unfortunately, there is no guarantee that any stock you buy and hold will turn out to be a winner for years or decades, no matter how great or compelling its story is. Economic changes, demographic changes, new competition, new technologies, and new ways of doing business can wreak havoc on any company’s well-intended plans.  But don’t let that discourage you – the rewards can be great!

Economic Moat Stocks

Warren Buffett likes to talk about investing in companies that have a economic moat around them. What does this mean? It means that he looks for a company that has a business model that is just about impervious to competitors.  Here are a few examples:
The moat could be a high barrier to entry, like phone and cable companies spending tens of billions setting up their voice and data networks.  It is just too expensive to try to become a major player in these markets.

It can be a toll road type business like Visa or Mastercard, who take a tiny piece of millions of transactions each day.

It can be a brand that is widely known and trusted like Starbucks or Coke.  It is very difficult for a new company to compete with them in their areas.

It can be a company like Google who have taken over search by doing it better and faster than its competitors.

It can also be a company with that is extremely well run and uses technology to improve its business.  Most retailers cannot compete with Wal-Mart, Home Depot, or Costco who have extremely well-honed supply chains that enable them to offer low prices.

How Do You Find The Next Winners?

For a company to become a powerhouse in business, it must provide a new product or service, or a better product or service than its competitors.  Think about Amazon, UPS and Fedex, Google, Proctor & Gamble, or Hershey.  They lead the field in their respective businesses.
Today, most of these companies have already made huge moves in their stock prices.  Once a company has become a leader and is a household name, its best days as a stock are many times behind it.

You want to look for companies that are not yet household names, but are bubbling under the radar.  Start to look for products and services that are just becoming well-known to the masses.  A great example was Apple back in 2004 when the iPod and iTunes became popular. They were just starting their tremendous growth back then. Apple followed up with the iPhone and iPad, and its stock rose dramatically for the next 8 years.

Think of companies like Facebook, Twitter, Zillow, Dropbox, and Pinterest that operate online businesses.  They are all well-known now, and some have already made big stock moves.  Dropbox and Pinterest are hugely popular but not yet public companies, so keep an eye out for them to announce an IPO.

Look for companies that are becoming well-known in new and growing areas like the Internet, data security, biotech, solar, nanotechnology, 3D printing, social media, etc.

Many of these future big winners will provide products and services behind the scenes.  An example would be Intel providing the computer chips inside computers and tablets.  Software providers, cloud computing companies, “big data” analytics companies like Splunk or Tableau Software, companies providing parts like gyroscopes in smartphones, and more are worth looking for.

Be A Stock Detective

So for now, as you go about your life, make a mental note when something new and different seems to be emerging with a company, product, or service.  Check out the company’s website and if public, its stock chart and fundamental info.
You are looking for companies that are growing fast, with earnings that are growing at more than 30% or so each year. They should be doing something new or different than their competitors.  And they should be regarded as an emerging leader in their field.  These three things are almost always present before a company’s stock takes off on its big moves.

The next Wal-Mart, Google, Berkshire Hathaway, or Apple is out there.  Will you find it?


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