WHAT to Buy by Buffett

Buffett Quotes on Great Businesses & Competitive Advantages

Investors can be divided into two broad categories:

• Bottom up investors
• Top down investors

Top down investors look for rapidly growing industries or macroeconomic trends. They then try to find good investments that will capitalize on these trends.

Bottom up investors do they exact opposite. They look for individual investment opportunities irrespective of industry or macroeconomic trends.

Warren Buffett wants to invest in great businesses. He is a bottom up investor.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”

Buffett prefers to invest in businesses that have differentiated themselves from the competition. Commodity selling businesses don’t have a differentiator (unless they are the low cost producer).

“Stocks of companies selling commodity-like products should come with a warning label: ‘Competition may prove hazardous to human wealth.’”

Commodity business (in general) are not quality businesses for long-term investors. The reason is because competition will erode margins and make investing in the business a zero-sum game.

Commodity businesses that have found a way to survive are not great businesses. The analogy below emphasizes this point:

“A horse that can count to ten is a remarkable horse—not a remarkable mathematician.”

Don’t invest in horses that can count to 10. Invest in businesses with a strong competitive advantage that allows for large excess profits…

And make sure that company’s competitive advantage is durable.

“Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me.”

Chewing gum doesn’t change much. Neither does Coca-Cola (KO), or banking with Wells Fargo (WFC), or Ketchup at Kraft-Heinz (KHC). Buffett invests in slow changing businesses because they will compound growth over the long run. 

Businesses in rapidly changing industries have shorter periods of time in which they can compound investor wealth.

Now that we have covered what to buy, it is time to see Warren Buffett’s thoughts on when to buy.

http://www.suredividend.com/warren-buffett-quotes/#circle of competence