Attributes of a Good Business: High Barriers to Entry, Brand Name, High ROIC, High FCF, Loyal Customers, Growth Opportunities, Great Management Team, Pricing Power, Strong Balance Sheet, Low Capex Requirements, High-return Reinvestment Opportunities, Commodity Inputs (suppliers have low power).
Attributes of a Bad Business: Obsolete Technology (newspapers), Money Loser, No Strategic Vision, Legacy Costs (high cost producer), A Commodity Product, Poor Corporate Governance, Heavy Regulation, Prone to Litigation, High Maintenance CapEx Requirements.
Therefore, it is highly important to look for these qualities in a business for investment:
- Look for companies that sell necessities
- Look for businesses that require little capital to grow earnings
- Look for companies with a history of strong, predictable cash flows
- Look for companies that have a structural cost advantage over their competitors
- Invest in companies that will survive – and even prosper – if the economy struggles
- Look for investments where it is obvious. Buffett wants it to be like shooting fish in a barrel where the water has been drained out.
- Focus on identifying and thinking about the key variable(s) that drives a business
- Focus your investments in companies that have a durable competitive advantage.
- Write down why you are buying a stock before you buy it! Buffett has been pounding the table on this one for years. Too few actually do it.
Use checklists; It will help your performance