I first heard of Warren Buffett in the late 1990s. While browsing a bookshop, I picked up a copy of Buffettology by Mary Buffett and David Clark.
Although I’d never heard of Warren Buffett before, I bought the book. It mesmerised me and I couldn’t put it down.
Sorting the business wheat from the chaff
At the time, my business was struggling to make money. But the ideas in Buffettology helped me turn the business around. And now they’re helping me pick great stocks and build wealth.
One of the main lightbulb moments for me was Buffett’s idea that most businesses aren’t actually very good, they’re mediocre — just like my old one was to begin with. But there are a handful of “wonderful” businesses with superior economics.
My mission became to turn my old business into one with superior economics. And my mission now is to buy the shares of businesses with superior economics when they’re trading at a fair price on the stock market.
There’s been a lot written about Buffett and his tips and techniques over the past couple of decades. But I still think Buffettology is the most useful book I’ve ever read regarding his investment methods.
My old business had all the hallmarks of a poor-quality business. It had low profit margins and sold products and services similar to those of other businesses in a very competitive market. It was what Buffettology describes as a commodity-type business, with little to distinguish it from its competitors.
So now when I’m picking stocks to hold as long-term investments, my aim is to avoid mediocre, commodity-style businesses. They will likely have erratic profits, low margins, poor brand loyalty from customers, high competition, over-capacity in the industry and low returns against equity.
Picking decent stocks using Buffett’s ideas
My old business had all those faults. So, I changed the focus, the service and the products to add value and increase profits and consistency. The process worked, and it was all because of the ideas set out in Buffettology.
Now I search for businesses that are “wonderful” in the first place and aim to buy some of their shares. Some of Buffett’s most enduring investments are what the book describes as consumer monopoly-type companies.
And they’re operations with some kind of monopoly for their products or services. Customers might favour the company’s offering because of things such as brands, geographical dominance, technological edge, or other things. And Buffett himself often talks of such enterprises as having an economic moat.
And consumer monopoly-type business tend to have predictable and robust business economics that enable them to generate lots of cash. Often, they’re less affected by general economic cycles than many of the mediocre, commodity-type businesses.
Of course, there’s no certainty with stock investments. And I can still lose money even if I choose “wonderful”, consumer monopoly-type businesses when they’re selling at a fair price. Nevertheless, over the past 20-odd years, Warren Buffett’s ideas have been helping me aim to become rich both through businesses and shares.
Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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