Perhaps one of the greatest pieces of advice of iconic investor Warren Buffett is to “buy great companies at decent prices, rather than decent companies at great prices.”
The Oracle of Omaha has repeated this sentiment over the years in various ways. The importance of this statement is that Warren Buffett did not start out investing this way. Rather, Buffett was a value investor, or “cigarette-butt” investor, meaning he would look for beaten-up companies he could “get one more puff out of.” It was after his portfolio grew to a decent size that he shifted his focus mainly from fundamentals, price and valuations to earnings quality.
I think that the importance of both fundamental value investing, and investing on the basis of intangibles such as brand value, consumer perception, etc. is the secret recipe.
Buffett makes this whole process look easy, but combining art and science to find a formula to hand-pick long-term winners is no easy feat, even for the best money managers, most of whom end up underperforming benchmark indices over 20 or 30 year timeframes.
Earnings quality is really a derivative of the quality of the underlying business, and finding companies with a stable history of earnings supported by intangibles such as brands, copyrights, patents, etc. is the key.
This combination of factors has been dubbed a “durable competitive advantage” by the likes of Buffett, a term now used by economists and is commonspeak in business circles. My view of how to identify durable competitive advantages is to do what Warren Buffett did when starting out: read and research, a lot. There’s no substitute for doing your homework - this is complicated stuff.
Invest wisely, my friends.
