What does Buffett look for?

Want to know what does Warren Buffett look out for before investing in companies? His investing strategies can be gleamed from the stock purchases he has made over the years. Some of the companies he has invested in would be Nike, Coca-Cola, Washington Post, Kraft, American Express, J&J, Wal-Mart, GE, P&G, among others. The following pointers are some of the criteria he looks out for before plunging his money into the business:

  • The company must have competitive advantage (wide economic moat) and protected from competitors
  • It has to have good earnings growth including free cashflow growth.
  • The company must have a low debt/equity ratio
  • It must have high and consistent returns on invested capital.
  • The company must have a history of retaining earnings for growth.
  • It has to have low capital expenditure so that money will not be tied up in maintaining its factories, for example but can be used for business growth
  • The company must demonstrate a history of reinvesting earnings in good business opportunities, and
  • Its management needs to have a good track record and must be competent
  • Buy only when the stock is sold at a huge discount to its true value

Warren Buffett has certainly invested in blue-chip companies as seen from the examples above. Blue-chip companies can become great value investments when the market becomes irrational (eg. during a crisis or temporary negative news).

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