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Motley Fool: 3 Traits Warren Buffett Looks for in a Stock

Motley Fool: 3 Traits Warren Buffett Looks for in a Stock
(AP)

By    |   Tuesday, 12 April 2016 09:01 AM


Legendary investor Warren Buffett "doesn't have superhuman stock-picking abilities or any type of magic powers — he simply looks for great businesses to buy, using principles that anyone can use," The Motley Fool explains.

The Fool recently went on to detail three characteristics that are common among Buffett stocks, "which you can apply to your own investment strategy."

  • Savvy risk management: Berkshire's single largest stock holding, Wells Fargo (NYSE:WFC), has a long history of smart risk management and efficiency, which has allowed it to consistently produce better profitability than the rest of the "big four" banks. "Just take a look at the bank's return on assets (ROA) and return on equity (ROE) over the past decade. Notice how the blue lines are always on top, in good times and bad," the Fool reported.
  • A wide economic "moat": "One of Buffett's main criteria he looks for when evaluating a stock or business is a wide economic moat. This refers to a sustainable competitive advantage that gives the company a leg up on peers and will preserve its market share and profitability for years to come," the Fool reported. Buffett favorite Coca-Cola (NYSE:KO) is a great example of this. "The company's brand name is one of the most recognized in the world, which gives the company pricing power over rivals. In fact, according to Millward Brown, Kantar, and Bloomberg, Coca Cola's brand alone is worth nearly $84 billion," the Fool wrote.
  • A "forever" business: One of Buffett's top stock holdings is Kraft Heinz (NASDAQ:KHC), acquired when Berkshire-owned H.J. Heinz merged with Kraft Foods in 2015. And, a big reason Buffett loves this company so much is that it's a "forever" business. "The lesson here is that Buffett loves companies with durable advantages (like strong brands) in a business that will be around forever. People will always need groceries, just like they will always need the other businesses in Berkshire's portfolio — banking, insurance, energy, pharmaceuticals, etc."
Buffett also likes to say that you only find out who has been swimming naked when the tide goes out.

And as noted above, one of the most integral parts of Buffett's outlook on investing has a bit of a medieval flair to it: moats, Business Insider reported.

Business Insider also dug this up from Berkshire's 2000 annual meeting:

"So we think in terms of that moat and the ability to keep its width and its impossibility of being crossed as the primary criterion of a great business. And we tell our managers we want the moat widened every year. That doesn't necessarily mean the profit will be more this year than it was last year because it won't be sometimes," Buffett said.

"However, if the moat is widened every year, the business will do very well. When we see a moat that's tenuous in any way — it's just too risky. We don't know how to evaluate that. And, therefore, we leave it alone. We think that all of our businesses — or virtually all of our businesses — have pretty darned good moats."

"Buffett is essentially talking about the competitive advantage that a business has over others — some sort of unique aspect to the good it offers or way it offers it that is difficult for other actors to replicate," BI explained.

For his part, the billionaire chairman of Berkshire Hathaway recently told CNBC that he was buying more U.S. stocks overall since the end of last year.

"We have bought more stocks since the end of the year," he said. "The country is not going to go away," he said. "The country will grow in value over time," he said, "We're almost always a buyer of stocks," he said. "It's hard to think about many months when we weren't a net buyer of stocks," he said,

But he did urge investors to use caution and common sense, and do their homework, CNBC explained.

"What you pay for a stock doesn't mean anything. What means something is where the company's going to be in five to 10 years," Buffett said. "I think IBM will be worth more money but, like I said, I could be wrong but we'll accept that."

He also discouraged the average investor from trying to emulate his investment strategy regarding IBM, adding that most investors are likely better off buying into an index fund, CNBC reported.

"I'm not an investment adviser. I wouldn't ever urge them to do anything based on what we do. If they want to do what Berkshire does, then they should buy Berkshire," he said.

(Newsmax wire services contributed to this report).

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Warren Buffett doesn't have superhuman stock-picking abilities or any type of magic powers -- he simply looks for great businesses to buy, using principles that anyone can use.
warren buffett, stocks, invest, shares
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2016-01-12
Tuesday, 12 April 2016 09:01 AM
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