One of the most disciplined investors of all time, Warren Buffett and Berkshire Hathaway (NYSE:BRK-B) (NYSE:BRK-A) stick to a specific set of rules with every investment that they make. It is this system that has allowed Buffett to deliver staggering returns over his illustrious career, and it also explains why he won't buy "it" stocks like Apple (NASDAQ:AAPL), Tesla Motors (NASDAQ:TSLA), and Amazon.com (NASDAQ:AMZN). So, why change a working formula? Here are a few of the rules of the Warren Buffett way and eight investments the Oracle of Omaha would never make.
The 100 year rule
This is a phrase Buffett has used in letters to his shareholders to justify certain investments. Basically, he invests in industries that are virtually guaranteed to withstand the test of time. Take a look at Berkshire's current holdings, and you'll see a lot of insurance businesses, food manufacturers, banks, and construction companies, to name a few. People will always need to insure their lives and possessions, safe places to keep their money, homes to live in, and food to eat.
What does the company do?
If he doesn't understand what they do, he doesn't invest in it. When Buffett dismisses a new tech investment, he often gets called "an old guy who just doesn't get new technology." Well, that may be true, so why would he throw billions of dollars into it? Just because other people are?
To find out if a stock could be considered by Buffett, once it passes the other two rules listed, it must have an identifiable competitive advantage in its industry. Coca Cola has tremendous brand recognition. Wells Fargo has some of the highest-quality assets of any bank.
This is by no means an exhaustive list, and there are plenty of other things Buffett looks for when investing. However, by using these three simple rules, we can identify tons of very popular companies that Warren Buffett would never have any interest in buying. Here's a slideshow with a few examples...
The greatest thing Warren Buffett ever said
Warren Buffett has made billions through his investing and he wants you to be able to invest like him. Through the years, Buffett has offered up investing tips to shareholders of Berkshire Hathaway. Now you can tap into the best of Warren Buffett's wisdom in a new special report from The Motley Fool. Click here now for a free copy of this invaluable report.
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The previous articles in our "12 Days of Berkshire" series:
12 Reasons Warren Buffett Is an Incredible Investor and How You Can Learn From Him
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Berkshire Hathaway, and Tesla Motors. The Motley Fool owns shares of Amazon.com, Apple, Berkshire Hathaway, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.