QUALITIES TO LOOK IN A BUSINESS FOR INVESTING

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

     

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