Winning with long-term visibility the Warren Buffett way
An effective way of finding good companies is to ask whether their product or service will undergo any change over the next 10 years
By Research Desk | Apr 3, 2019
Investors who have come to the market in the last 10 years have only seen it go up. And yet, many of them do not think about the long-term demand for a company's products and its impact on stock returns. The world's greatest investor Warren Buffett's approach to investing essentially involves taking a long hard look at where a company will be 5 to 10 years from today. Here, we show you how you can improve your stock returns if you follow Buffett.
Buffett gives a lot of weight to whether a business is stable and has been successfully doing the same thing for decades. His rationale is that such businesses develop a franchise over decades of operations. He explains, 'The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.... a business that constantly encounters major change also encounters many chances for major error.' This for him does not mean that management can afford to be complacent. In fact, he points out that there will always be scope for improvement of services, product lines, manufacturing techniques, and so on. However, he is wary of businesses that are in the habit of embracing major change to their core business. Companies should aim to build a 'fortress-like business franchise' that can sustain high returns.
As investors, we have to train ourselves to assess how a company is going to do 5 or 10 years ahead. You want it to be continuing to do the same thing again and again.
'There are all kinds of important subjects that Charlie and I, we don't know anything about, and therefore we don't think about them. So we have - our view about what the world will look like over the next ten years in business or competitive situations, we're just no good.
We do think we know something about what Coca-Cola's going to look like in ten years, or what Gillette's going to look like in ten years, or what Disney's going to look like in ten years, or what some of our operating subsidiaries are going to look like in ten years.
We care a lot about that. We think a lot about that. We want to be right about that. If we're right about that, the other things get to be - you know, they're less important. And if we started focusing on those, we would miss a lot of big things.
I've used this example before, but Coca-Cola went public in, I think, it was 1919. And the first year one share cost $40. The first year it went down a little over 50 percent. At the end of the year, it was down to $19. There were some problems with bottler contracts. There's problems with sugar. Various kinds of problems. If you'd had perfect foresight, you would have seen the world's greatest depression staring you in the face, when the social order even got questioned. You would have seen World War II. You would have seen atomic bombs and hydrogen bombs. You would have seen all kinds of things. And you could always find a reason to postpone why you should buy that share of Coca-Cola.
But the important thing wasn't to see that. The important thing was to see they were going to be selling a billion eight-ounce servings of beverages a day this year. Or some large number. And that the person who could make people happy a billion times a day around the globe ought to make a few bucks off doing it. And so that $40, which went down to $19, I think with dividends reinvested, has to be well over $5 million now. And if you developed a view on these other subjects that in any way forestalled you acting on this more important, specific narrow view about the future of the company, you would have missed a great ride. So that's the kind of thing we focus on.'