Buffett: The value of investing in truly GREAT COMPANIES

Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

During the 1996 Berkshire Hathaway Annual Meeting, Warren Buffett discussed the value of investing in truly great companies that will remain strong for decades. He advises against trying to time the market or waiting for a financial crisis to buy stocks at a discount, as great companies are rare and difficult to find. Instead, Buffett suggests buying and holding onto these companies long-term, with the confidence that they will thrive over time. Here’s an excerpt from the meeting: Buffett: Yeah. Well, I won’t comment on the three companies that you’ve named. But in general terms, unless you find the prices of a great company really offensive, if you feel you’ve identified it — And by definition, a great company is one that’s going to remain great for 30 years. If it’s going to be a great company for three years, you know, it ain’t a great company. I mean, it — (Laughter) So, you really want to go along with the idea of something that, if you were going to take a trip for 20 years, you wouldn’t feel bad leaving the money in with no orders with your broker and no power of attorney or anything, and you just go on the trip. And you know you come back, and it’s going to be a terribly strong company. I think it’s better just to own them. I mean, you know, we could attempt to buy and sell some of the things that we own that we think are fine businesses. But they’re too hard to find. I mean, we found See’s Candy in 1972, or we find, here and there, we get the opportunity to do something. But they’re too hard to find. So, to sit there and hope that you buy them in the throes of some panic, you know, that you sort of take the attitude of a mortician, you know, waiting for a flu epidemic or something. I mean — (laughter) — it — I’m not sure that will be a great technique. I mean, it may be great if you inherit. You know, Paul Getty inherited the money at the bottom, in ’32. I mean, he didn’t inherit it exactly. He talked his mother out of it. But — (laughter) — it’s true, actually. You can find the entire discussion here: https://acquirersmultiple.com/2024/08/warren-buffett-dont-wait-for-a-price-drop-to-buy-a-great-company/

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Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

Great companies are rare and difficult to find.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

Look for truly great companies that will remain strong for decades.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

And by definition, a great company is one that’s going to remain great for 30 years.

If it’s going to be a great company for three years, you know, it ain’t a great company.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

He advises against trying to time the market or waiting for a financial crisis to buy stocks at a discount, as great companies are rare and difficult to find. Instead, Buffett suggests buying and holding onto these companies long-term, with the confidence that they will thrive over time.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

Unless you find the prices of a great company really offensive, he advises against trying to time the market or waiting for a financial crisis to buy stocks at a discount, as great companies are rare and difficult to find.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business.

If that comes with rapid organic growth, great.
But even without organic growth, such a business is rewarding.
We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere.
There's no rule that you have to invest money where you've earned it.
Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

Capital Expenditure

A great company with a Durable Competitive Advantage will have a ratio of Capital Expenditures to Net Income of less than 25%. Less is better.

Capital Expenditures are expenses on:
- fixed assets such as equipment, property, or industrial buildings
- fixing problems with an asset
- preparing an asset to be used in business
- restoring property
- starting new businesses

A good company will have a ratio of Capital Expenditures to Net Income of less than 50%.

A GREAT company with a Durable Competitive Advantage will have a ratio of less than 25%.

Less is better.

Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥

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Posted by Integrity. Intelligent. Industrious. 3iii (iiinvestsmart)$€£¥ > 2 months ago | Report Abuse

On 'Great' businesses, Buffett says,

"Long-term competitive advantage in a stable industry is what we seek in a business.

If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding.

We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There's no rule that you have to invest money where you've earned it.

Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

=======

Truly GREAT companies, earn high profits on their net tangible assets. These companies have high ROEs. Look for ROEs > 15% annually.

Example: An enterpreneur started a new business by buying a machine for $X. This machine generated $X of net profit in a year. The ROE for this business was 100%. This return is exceptionallly high. If the company buys another machine, its business would not be increased, as one machine was enough for its business. Thus, reinvesting the profit back into the same business is not going to improve its profits, as the same increment in profits can be generated by the one machine alone. Thus, that profit is better redeploy to earn returns elsewhere.

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