"Buy a business that is so good that any idiot could run it, because sooner or later, one will". ~ Peter Lynch
Given the current economic conditions we are in, I thought this to be an appropriate video to reassure young investors that it is not a time to run from the stock market, but a time to start looking for bargains.
Buffett speaks to a group of MBA students at the University of North Carolina about his basic investment strategies. If you have been following his work, you would see that he is consistent; his message is basically the same. After the Peter Lynch quote above, he reiterates his underlying investment philosophy to the students once again.
"All I know is that if I buy the right kind of business, at the right price, with the right people, I will do well over time."
Let's really analyze what he means here.
The right kind of business
These few words mean a lot in the mind of Warren Buffett.
i. Look for businesses with great future economics. These are business that are able to earn high returns on investment 5 - 10 years from now.
ii. Look for businesses with wide moats. These are businesses that have a sustainable competitive advantage making it extremely difficult for competitors to reduce their margins. He loves the example of Wrigley's Chewing Gum.
iii. Look for businesses within your circle of competence. These are businesses that you understand. He believes firmly that any great investment is one that could be explained in a small paragraph. It should not be too complicated. Also, the important thing is not how big that circle of competence is, but to know where the line is. Basically, stick to what you know....simple as that.
The right price
This is another crucial investing strategy for Warren Buffett. He understands that not all great businesses should be bought because they are great businesses; the price must also make economic sense as well. I totally agree. What makes a great investment is the price you pay for the company. He has been known to follow some of his favorite companies for years without ever buying them because the price was not reasonable. This is a true test of patience.
The right people
I do not know anyone that places such a great emphasis on management as Warren Buffett does. After looking at the occurrences on Wall Street in the past few years, I understand why. Integrity of management is goodwill. He will be willing to pay a premium for a company because of the management. Great companies have fallen because of lack of integrity, therefore it is important to analyze the management before committing to the company. Fortunately it is something that he has always been able to do very well. As we delve more into his annual reports, we will do a piece on management to understand exactly what he looks at.
He reinforces that once an investor does all of these things, they will perform well over time. The 'over time' means that one must have a long-term outlook on investing. When a student asked about the most appropriate time to sell, he said "never". Good companies are so hard to come by, that when you find them, you buy a lot of them and hold on to them forever. It was a lesson that took him a very long time to learn.
That one statement, as you can see, has a lot of meaning and it is the fundamental of his investment philosophy. This is one of my favorite videos of him talking to students. The amount of information he is willing to share amazes me. I look forward to hearing what you all think. We have a lot to learn.
Love, peace and money.