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The Inevitables: Buffett's Strategy for Identifying Companies That Will Dominate for Decades

By sagebytes —

Buffett's Investment Best Practices

Extracted from Warren Buffett's 1996 Letter to Berkshire Hathaway Shareholders

Core Investment Philosophy

Buffett focuses on acquiring businesses with excellent economics and able, honest management at sensible prices - whether buying entire businesses or minority stakes in public companies.

The "Inevitables" Approach

  • Look for businesses with sustainable competitive advantages that will dominate their fields for decades
  • Examples: Coca-Cola and Gillette - companies with predictable, growing earnings likely to strengthen their dominance
  • Prefer certainty over speculation: "I would rather be certain of a good result than hopeful of a great one"
  • Avoid rapidly changing industries: "Fresh ideas, new products, innovative processes... cause our country's standard of living to rise... As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride"

Holding Strategy

  • Long-term perspective is essential: "If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes"
  • Don't sell winners just because they've become a large portion of your portfolio
  • Inactivity is intelligent when you own excellent businesses: "We continue to make more money when snoring than when active"

Business Evaluation Principles

  • Focus on businesses unlikely to experience major change
  • Look for operations that will maintain competitive strength 10-20 years from now
  • Seek predictability: Even as businesses evolve, the fundamental reasons customers buy their products should remain constant

Portfolio Construction

  • Build a portfolio of companies whose aggregate earnings march upward over the years
  • You only need to evaluate companies within your "circle of competence"
  • You don't need many investments: "You don't have to be an expert on every company, or even many"

For Most Investors

  • Index funds are the best option: "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees"
  • Those following this path will beat most investment professionals after fees and expenses

Investment Education

Investors need only two well-taught courses:

  1. How to value a business
  2. How to think about market prices

Investors do not need to understand:

  • Beta
  • Efficient markets
  • Modern portfolio theory
  • Option pricing
  • Emerging markets

Final Wisdom

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now."