Investment

Warren Buffett's 'secret sauce' for investing success: Be 'business pickers' not 'stock pickers' – CNBC

Published

2 years ago

March 1, 2023

Berkshire Hathaway founder Warren Buffett — one of the most successful investors in the world — says he and vice chairman Charlie Munger are not “stock pickers; we are business pickers.”

In the company’s annual shareholder letter published over the weekend, Buffett explained that the “secret sauce” of their investing success is to make “investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.”

This approach is known as value investing, where the goal is to hang on to a top-performing stock rather than trade stocks based on short-term price fluctuations, otherwise known as active investing.

Of course, picking winners isn’t easy. But Munger has previously outlined four rules that the two Berkshire Hathaway executives follow when choosing whether to invest in a business.

Aside from Buffett’s No. 1 rule, “don’t lose money,” here are four questions that Munger and Buffett ask when deciding whether or not to invest in a business.

1. Do you understand the business?

Aside from knowing how a business operates and what it offers to consumers, you also want an idea of where a company is going to be in 10 years, if not for decades, says Buffett. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes,” he wrote in his 1996 letter to shareholders.

Berkshire Hathaway famously missed out on tech companies Google and Amazon in the early 2000s, because Buffett wasn’t sure he understood the businesses in terms of their long-term profitability. This made it harder to determine the value of their stocks.

While Berkshire may have passed on Google and Amazon, other investments in blue-chip companies like American Express and Coca-Cola have paid off over time.

This cautious approach might mean missing out on more speculative opportunities, but Buffett has said that he and Munger “miss a lot of things, and we’ll keep doing it.”

2. Does the business have a durable competitive advantage?

Buffett has said that the “most important” factor in picking a successful business investment is the company’s competitive advantage, which he likens to a “moat” surrounding an “economic castle.”

The more secure the competitive advantage, the more likely the company will prosper over decades.

A competitive advantage could be a powerful brand that people are always willing to pay for, like Coca-Cola, or it could be a unique business model, like selling insurance directly to the consumer rather than through insurance brokerages, as is the case with Geico.

3. Does the business’ management have integrity and talent?

Buffett has said that he looks for three things in a manager or leader: intelligence, initiative and integrity. But integrity matters most of all, “because if you’re going to get someone without integrity, you want them lazy and dumb,” he said in a 1998 speech.

“We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business,” Buffett wrote in a 1989 shareholder letter. “We’ve never succeeded in making a good deal with a bad person.”

With integrity comes trust. That means Buffett and Munger don’t have to spend much time micromanaging every decision a leader makes.

“The important thing we do with managers, generally, is to find the .400 hitters and then not tell them how to swing,” said Buffett at the 1994 Berkshire annual meeting.

4. Does the price make sense?

As passive investors, Buffett and Munger seek out companies that seem to be trading for less than their intrinsic value.

While there’s no universal measure of value, companies with long-lasting earning potential tend to have consistent earnings, good cash flow and a low amount of debt. When a stock price seems low compared to the company’s value, that’s an opportunity to buy.

But that doesn’t mean that Buffett and Munger seek out the best bargains based on the stock price alone. Simply getting a fair price on a company’s stock can be an effective strategy, too. You’re investing in the business long-term, not just the stock price at the time of purchase.

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price,” wrote Buffett in his 1989 annual shareholder letter. “When buying companies or common stocks, we look for first-class businesses accompanied by first-class management.”

Get CNBC’s free Warren Buffett Guide to Investing, which distills the billionaire’s No. 1 best piece of advice for regular investors, do’s and don’ts, and three key investing principles into a clear and simple guidebook.

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Economy

S&P/TSX gains almost 100 points, U.S. markets also higher ahead of rate decision

Published

3 days ago

September 13, 2024

Anne Joseph

TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.

“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.

In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.

The S&P/TSX composite index closed up 93.51 points at 23,568.65.

While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.

Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.

But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.

Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.

“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.

“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.

A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.

It would also be “counter to what they’ve signaled,” he said.

More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.

“That’s going to be more important than the size of the cut itself,” he said.

In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.

“Here, the labour situation is worse than what we see in the United States,” he said.

The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.

The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.

The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 13, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

Published

1 week ago

September 6, 2024

Anne Joseph

TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

3 weeks ago

August 29, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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