Warren Buffett and his investment team oversee Berkshire Hathaway (BRK.A +0.05%)(BRK.B +0.01%), a massive conglomerate. When the Oracle of Omaha buys a stock, investors across Wall Street do a deep dive -- which is why you might want to buy Pool Corp. (POOL +0.91%) today.
But the real way that his investment could make you richer concerns what you do after you buy it. That's where Buffett's approach really shines.
Image source: The Motley Fool.
What does Warren Buffett do?
Warren Buffett is the CEO of Berkshire Hathaway. But Berkshire Hathaway isn't a typical company. It is a massive conglomerate with more than 180 controlled businesses within it and a portfolio of publicly traded stocks. In fact, in some ways, Berkshire Hathaway is more like a mutual fund than a company.
This is why so many investors pay attention to the stocks Buffett buys. His investment approach is deceptively simple. He likes to buy well-run companies. And he likes to buy them when they are attractively priced. Pool Corp.'s stock has fallen around 45% from its coronavirus pandemic highs. Its price-to-sales and price-to-book value ratios are both below their five-year averages. In multiple ways, Pool looks attractively priced.
That said, the real value in Buffett's approach is what comes after buying a stock. He holds it for the long term, benefiting from the growth of a well-run business over time. The key with Pool's business is that it has an inherent growth bias.
Why Pool can make you richer over the long term
Pool is unlikely to be an overnight success story. That's because about a third of its business, which is tied to building pools, is highly variable, fluctuating with economic activity. People tend to build new pools when times are good and not when they are worried about their finances in a recession.
The coronavirus pandemic period created an unusual spike in demand for new pools because people were trapped at home with nothing to do. Add in the low interest rates at the time, and that demand ended up supercharged. Wall Street extrapolated the demand way too far into the future. When interest rates rose and the world reopened, new pool construction slowed. Pool's story changed, and the stock tanked.
NASDAQ: POOL
Key Data Points
But what Buffett is likely looking at is the other two-thirds or so of the business that is related to pool maintenance. Every pool that gets built needs to be maintained, or it could become a disgusting mess. Thus, every new pool increases Pool's customer base. And that gives the retailer's business an inherent growth bias. Indeed, the chemicals it sells are really necessities if you own a pool.
Investors looking to get rich overnight bought Pool when Wall Street thought pool demand would go to the moon. Investors like Buffett are stepping in now that those investors are gone. He's happy to build wealth slowly and over time as Pool executes on its simple model of providing pool owners easy access to the maintenance products they have to have. The volatility of new pool construction is really just a distraction from the long-term wealth-building opportunity here.
Pool Corp. is the kind of stock to buy and hold
There are two sides to Buffett's investment approach. The buy side is the exciting one that investors pay the most attention to, but the holding for the long term is where real wealth is built. That's not as exciting, and it can mean holding through periods that make some investors sell.
Pool has an inherent growth bias in its business and it is likely Buffett recognizes this, leading to his purchase of the stock. You might want to follow his lead. But don't ignore what comes next -- holding on for the long term so you can benefit from the growth of the business over time.
