When you think about investing, the first thing that comes into your mind is this complicated world of the stock market where no one seems to clearly understand what’s going on.
Because whenever things seem to go in the right direction, we end up facing a financial disaster. But unlike everyone else, one gentleman seems to know a secret formula when it comes to investing.
Over his life, he continuously made successful investments over and over and he is considered by many, as the greatest investor of all time.
He was so good that just by the age of 16, he already made over 53K thousand dollars. It still surprises me, how Harvard didn’t accept him, they probably regret it now.
But that doesn’t matter, because what we are going to focus on this article is, how does warren Buffett invest? A lot of people out there are eager to invest but they don’t know which companies to invest in.
So I thought, How about we take a look at a step by step process of how Buffett’s picks a stock. He doesn’t randomly invest, if you take a look at all the companies he has ever invested, you will realize that they are interconnected?
They have similar traits, similar values, and function in a similar way, so let’s find out why does he prefer one stock over the other? Why does he pick this company over all the others?
1. Simple and direct
Warren Buffett is a long term investor, he couldn’t care less about how the company is going to perform today or tomorrow or even next year. His primary concern is, where the company is going to be 10 years from now or 15 years from now.
But it’s quite difficult to predict that if the company is too complicated. So he just looks for businesses that are simple and direct. This is the product, these are the customers and this is why they are going to buy it, you don’t have to be a genius to understand their business model, its so simple that even a little kid would understand it.
That’s what Buffett loves, because, the simpler the business model, the easier it gets to predict if their products are going to stay relevant 10 years from now.
2. Will the customer buy the product again
The second trait is, will the customer buy the product again and why? And this is remarkably important because if you have the kind of product that would sell once and the client wouldn’t need it anymore, then your market is limited. A great product is when your clients would keep coming back for it, every day or every week or even every year.
Like bread, if you are selling bread, you would expect the exact same customers to come back tomorrow or next week over and over and 10 years from people would still need bread.
You might sell it in a different way, or a different form, you might improve the quality, package it fancier, but it’s still the same product that people would keep coming back for.
And that’s what makes iPhone by the way, one of the greatest products in history because people kept coming back for it every September even though it’s not a necessity like bread.
In fact, that’s the reason behind the subscription business model, where the businesses would charge you a little fee every month like Netflix for example or ever year like amazon prime, because it’s a more sustainable strategy. But at the end of the day, it all comes down to how much value you get for that subscription.
An average book costs around 15 dollars, but if someone would take the best insights from thousands upon thousands of nonfiction books and summarizes them into a 15-minute read and listen for half of the price of the book. That’s a subscription worth giving a shot!
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3. Brand Name
The 3rd component is the brand. People have the tendency to buy from the companies that they feel connected to or familiar. Who’s sneakers would you buy, the first ones are from a brand that you have never heard of and the second ones are good old Nike’s. Even if they look fancier or, you probably would hesitate to buy them because you simply haven’t heard of that brand before.
On the other side, you easily recognize Nike, it’s a well-established brand, you easily recognize it and they are known for making great sneakers. You might already be wearing a pair of Nike shoes, so what would you chose.
And that’s why Buffett pays such important attention to how powerful is the brand name before throwing his billions into that company. He understands how big of an of influence it’s going to have on the consumer’s decision.
In fact, if the brand is strong enough, consumers would buy almost anything that company produces. Warren Buffet is one of the major investors in Coca-Cola. He started investing in Coca-Cola back in 1988, and his investments since then have grown by over 16 times.
Coca-cola is one of the few companies that have all the traits Buffett look at before considering investing. First of all, their business model, it’s so simple that anyone would understand it. what do they sell, a drink! who are their potential customers? Pretty much anyone who is thirsty, the entire world! Is it a one-time product or their clients would keep coming back for it every now and then? Of course, they will keep coming back, some people drink 4 or 5 cans a day.
It’s a product that satisfies one of our most important needs! And once you get used it, it’s addictive, it’s not easy to quit even if its unhealthy! However, it has a lot of competitors, I mean the shops are filled with endless number of soft drinks, they are so many of them that it seems like there is a new soft drink company emerges every other day! But the coca cola brand name is so powerful that out of 20 or 30 options, you easily recognize it. Most people would probably pick Coca-Cola without even thinking, and if its out of stock, you probably would go to another store instead of choosing one of the 30 other options they have.
Think about it, 1.8 billion cans are sold every single day. If the company will earn a single penny out of every can that they sell, that’s 18 million dollars a day, or 6,570 million a year. But with such a powerful brand that they have, they can charge more than a penny for every can. That’s why Buffett bought 1 billion dollars of coca cola shares back in 1988. It’s his biggest investment, he was confident that 10, 20 or even 30 years later, this company will just keep growing, regardless if the economy will crush, or another financial crisis is on a horizon.
Let’s take a look at another example. In 1989, Warren invested 600 Million dollars in Gillette. The company that makes razors, and if you give it a closer look, Gillette holds the exact same position in its industry as Coca-Cola does in beverages. They are like twin brothers. Regardless of what happens, people will still shave. And their products are just filling that basic human need.
You don’t need to have an IQ of 150 to understand why people are buying razors or while they will keep coming back for that product even 10 years from now. But of course, Gillette isn’t the only company in its industry , it has a ton of competitors, however, if you ask people to name a razor brand other than Gillette, 90% of people won’t be able to do that.
Do you see how it perfectly matches with all the requirement that buffet has. It’s a simple product that people would keep buying and it has a strong brand name. The exact same story repeats with See’s Candy.
In fact, it has been one of his best investments ever. Even though that the company wasn’t as profitable as buffett wanted, it had an extremely strong brand, that made all the difference. Buffet realized that people don’t usually buy candy’s for themselves but usually as gifts to others. So people would keep coming back for Christmas, valentine’s day, birthdays whatever. So, he acquired the company in 1972 for 25 Million dollars when it was making roughly 4 million dollars in profit.
Since then, Company’s profit increased 20 times over the next 35 years. In 2007, their profit exceeded 82 Million dollars. Buffett always stayed out of the tech world, but recently he massively invested in apple. We live in an age where technology has become more of a need than want.
And apple keeps creating the type of tech that people keep coming back for. Apple has an army of fans who update their iPhone every single year. Of course apple isn’t the only tech company out there, but it definitely has the strongest brand name.
Of course, you still have to look at the financial statement of the company, consider other factors that will influence the future of the company. And each company has some unique circumstances, but overall, these are the 3 most important factor to consider when you are thinking where to throw your money in.