Investing legend Warren Buffett's holding company Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) has outperformed the market by thousands of percentages in its lifetime, including beating the market in 2022 with a 4% gain versus the S&P 500's 19% loss.
Berkshire Hathaway owns many whole companies, which are private, or become private when it takes them over. It also has large equity positions in around 40 publicly traded companies, and investors eagerly anticipate Berkshire's 13F filing, in which it details what stocks it bought or sold each quarter.
Investors who want to invest like Warren Buffett can buy shares of Berkshire Hathaway. But they can also buy stocks that Buffett buys, if those stocks fit into their personal investing plan, or follow some of his strategies and see how it helps them choose winning stocks. Even if your own investing approach looks different than Buffett's, you might want to keep in mind the two simple qualities he sees as essential to any business he invests in.
1. Durable economic advantages
One theme that emerges throughout many of Warren Buffett's communications is that he likes to invest in businesses with "durable economic advantages." There are several layers to unpack here.
The overall characteristic here is commonly referred to as a moat, a term Buffett has used in other places. He describes the moat as a protective barrier around a business that shields it from oncoming competition, like a moat guarding an "economic castle." It can come in many forms, such as a strong brand, specific product attributes, or an unbeatable distribution network.
"The average company, in contrast, does battle daily without any such means of protection," Buffett says. "As Peter Lynch says, stocks of companies selling commodity-like products should come with a warning label: 'Competition may prove hazardous to human wealth.'"
It's also notable that Buffett uses the description "durable." Economies, cultures, and trends are always changing. An economic advantage is valuable when it's durable, or can adapt as the climate demands.
He also stresses that he focuses on businesses rather than stocks. When the investor focus is the stock price, that can lead to following stock movements and paying too much attention to what the stock is doing. When the focus is on the business, investors are more inclined to home in on great companies with a high likelihood of long-term success in their operations, which ultimately leads to stock gains.
One of the examples Buffett uses to define a company with a durable economic advantage is Coca-Cola (KO 0.10%), which is Berkshire Hathaway's longest-held equity position. Buffett quotes this gem from Fortune magazine, written in 1938, or 50 years after Coca-Cola started selling cola: "Several times every year a weighty and serious investor looks long and with profound respect at Coca-Cola's record, but comes regretfully to the conclusion that he is looking too late. The specters of saturation and competition rise before him." Buffett quoted this in his 1993 shareholder letter. Coca-Cola stock, dividends included, has gained nearly 1,000% just since then.
2. A first-class CEO
When Buffett and his team acquire a whole company, they install their own hand-picked CEO. But in a company in which they own a minority equity position, they look for a business with a "first-class CEO." Buffett explains that in the second case, he's putting his trust in the CEO to run the business effectively, and so he looks for trustworthy managers.
He warns investors that it's not particularly hard to manipulate earnings. One CEO called it "Bold imaginative accounting." But if you're looking to invest in businesses that can last over the long term and provide decades of shareholder wealth, you'll need to make sure the CEO has integrity and is devoting energy and resources to the company's advancement.
A great business
These two traits together make up what Buffett considers a great company. Of course, he goes through some serious evaluations to determine whether a given company meets these criteria. Any individual investor can find great companies to invest in using these as a guide.
