How Does Warren Buffett Choose Stocks?

A student of Ben Graham’s method of value investing, Warren Buffett has managed to beat the market more often than not. He is renowned as the world’s top investor and has garnered worldwide attention for his impressive investing skills. He’s also risen to become one of the richest men in the world.

While it’s not realistic to say that anyone could copy his success, researching Buffett and learning his methodologies can greatly help any investor better understand the market and make better choices. So, with that in mind, we’ve looked at several questions that Buffett asks when he is evaluating and choosing a stock or company to purchase:

1. Does it have good profit margins?

Obviously, it’s impossible to make money off of a company that isn’t profitable. Buffett looks at the company’s historical profit margins for at least the last few years in order to get a good image of what the company’s profits look like. Many industries are seasonal, so it’s especially important to look at trends over longer periods of time to better understand where the money comes and goes.

2. Are the shares trading at less than their value?

Warren Buffett is, first and foremost, a value investor. This means that he is always looking for companies that are selling for lower than their intrinsic value. These companies may simply be having a downturn or might have fallen on hard times, but are still solid companies with good reputations, excellent product, and strong management in addition to good opportunity for profit.

3. Is the product or service unique?

Buffett refers to this as a company’s ‘moat’ and it’s something he looks for in all the companies he touches. If the product is exactly the same as everyone else’s, then there won’t be anything to ensure that it will remain profitable several years down the line. Every company needs to stand out and have something special about it or its product in order to be a good long term investment.

4. Will it still look good in 10 years?

Unlike many other investors, Buffett is never in things for the short term gain. Although he has done that in the past, he makes sure to not only look ten years (or more) in the past to ensure the company is a good value, but 10 years in the future to make sure that it’s headed in a good direction. Buffett might not hold it forever, but he also isn’t usually buying only for a quick fix.

One Comment

Leave a Reply

Your email address will not be published. Required fields are marked *