How Warren Buffett picks stocks

February 27, 2017

“Excellent business results by corporations will translate over
the long term into correspondingly excellent market value and
dividend results for owners, minority as well as majority,” Warren Buffett once said.

How true this is even today although Mr Buffett said this as far back as 1978 in a letter to Berkshire Hathaway shareholders for FY1977.

When it comes to marketable equity securities, the Berkshire Hathaway chairman selects them in much the same way as he would evaluate a business for full acquisition.

Mr Buffett lists four criteria for selecting securities:
(1) the business of the company must be one that he can understand;
(2) it must have favorable long-term prospects;
(3) it must be operated by honest and competent people; and
(4) the securities must be available at a very attractive price.

Notice the emphasis on long term?

In the words of the Berkshire Hathaway chairman: “We ordinarily make no attempt to buy equities for anticipated
favorable stock price behavior in the short term. In fact, if
their business experience continues to satisfy us, we welcome
lower market prices of stocks we own as an opportunity to acquire
even more of a good thing at a better price.”

In a point that underscores value investment, he said: “Our experience has been that pro-rata portions of truly
outstanding businesses sometimes sell in the securities markets
at very large discounts from the prices they would command in
negotiated transactions involving entire companies.
Consequently, bargains in business ownership, which simply are
not available directly through corporate acquisition, can be
obtained indirectly through stock ownership. When prices are
appropriate, we are willing to take very large positions in
selected companies, not with any intention of taking control and
not foreseeing sell-out or merger, but with the expectation that
excellent business results by corporations will translate over
the long term into correspondingly excellent market value and
dividend results for owners, minority as well as majority.”