The world-renowned investor and founder of Berkshire Hathaway, Warren Buffett defines himself and his vice president Charlie Munger as “business pickers” and not “stock pickers.” For the two legendary businessmen, the key to success lies in “investing in companies that have as much trust managers as favorable and lasting economic characteristics“, he explained.
Last weekend the company’s annual shareholder letter was published, and in it Buffett spoke of what for him is the “secret ingredient” of your success in the world of investments.
With respect to Buffett’s approximation, this is called “value investing” or “value investing”, and it is about anchoring in high-yield stocks instead of exchanging others according to short-term price fluctuations (which in turn is called “active investing” or “active investment” And due to difficulties in identifying the ‘winning horse’, Munger has previously offered four rules he and Buffett use as a guide when choosing whether or not to invest in a business. Apart from the most basic that the president of Berkshire Hathaway always comments, which consists of “Not losing money”, These are Munger’s rules:
1. Understand the business
Apart from understanding themode of operation’ and the service or product of a business, Buffett says that it is elementary to ask where the company will be in 10 years, or even in several decades. “If you’re not willing to own a stock for 10 years, then don’t even think about having them for 10 minutes“, were his words already in the letter corresponding to the year 1996.
For example, Berkshire Hathaway missed out on big tech like Google and Amazon in the early 2000s, but that was precisely because its chairman did not understand the technology business in terms of long-term profitability. This made it difficult for him to be able to determine the value of his shares.
Despite this, other investments by Berkshire Hathaway in blue chip companies such as Coca-Cola and American Express did pay off. Therefore, an approach as cautious as Buffett’s could mean missing out on more than one speculative opportunity: “We miss a lot of things and we will continue to do so,” he said about Munger and about himself.
2. Do you have a lasting competitive advantage?
For Warren Buffett, the “most important” factor when choosing the right business investment is the competitive advantage of these, and which he often compares to a “moat surrounding a castle”. The safer it is, the more likely it is that the company prosper over time.
As in the case of Coca-Cola, a competitive advantage may be a reputable brand for which people are willing to pay. But it can also be a unique business modelas Geico does by selling insurance directly to the customer, instead of delegating to brokerage agencies.
3. What are the managers like?
Buffett himself comments that he always looks for three things in a manager or leader of a company: intelligence, initiative e integrity, with the third being the one that counts the most for him. In a 1998 speech, he himself explained that: “If you are going to have someone without integrity, so you want him lazy and dumb“.
With this quality comes confidence., which translates into not having to spend a lot of time excessively controlling each decision that the manager makes. “We don’t want to team up with bosses who don’t possess these qualities, regardless of your business prospects. We have never succeeded in signing a deal with a bad person,” he said in another annual letter, in 1989.
For his part, at the 1994 Berkshire Hathaway annual meeting, Warren Buffett said that: “The most important thing we usually do with managers is to find the 400 heavyweights of the businessand then we don’t tell them how to play.”
4. Does the price make sense?
As passive investors, Buffett and Munger look for businesses that seem trading for less than its intrinsic value. But there is no universal measure for delimiting the value of companies, although Buffett’s advice is Opt precisely for those with long-lasting earning potential, because they usually go hand in hand precisely with consistent income, with low amounts of debt and with a good cash flow. In short, when the price of the shares seems less than the value of the company, then it is a good opportunity to invest.
This is not to say that Buffett and Munger only look at the value of the shares to choose where they put their money. Get a fair price for the shares It is also a good decision for investors, since it is bought for the long term, and not only because of the share price at the time.
“It is much better to buy a great company at a fair price than a fair company at a great price. When you buy business or common stock, We look for first class companies accompanied by first level managersBuffett announced in his 1989 shareholder letter.
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