When you think about investing. The first thing that comes into your mind is this complicated
world of the stock market where no one seems to clearly understand what's going on. Because
whenever things seem to go in the right direction, we end up facing a financial disaster.
But unlike everyone else, one gentleman seems to know a secret formula when it comes to
investing. Over his life, he continuously made successful investments over and over
and he is considered by many, as the greatest investor of all time.
He was so good that just by the age of 16, he already made over 53K thousand dollars.
It still surprises me, how Harvard didn’t accept him, they probably regret it now.
But that doesn’t matter, because what we are going to focus on this video is, how does
warren Buffett invest?
a lot of people out there are eager to invest but they don’t know which companies to invest
in? So I thought, How about we take a look at a step by step process of how Buffett’s
picks a stock. He doesn’t randomly invest, if you take a look at all the companies he
has ever invested, you will realize that they are interconnected?
They have similar traits, similar values, and function in a similar way, so let's find
out why does he prefer one stock over the other? why does he picks this company over
all the others?
Simple & Direct
Warren Buffett is a long term investor, he couldn’t care less about how the company
is going to perform today or tomorrow or even next year. His primary concern is, where the
company is going to be 10 years from now or 15 years from now. But its quite difficult
to predict that if the company is too complicated. So he just looks for businesses that are simple
and direct. This is the product, these are the customers and this is why they are going
to buy it, you don’t have to be a genius to understand their business model, its so
simple that even a little kid would understand it. That's what Buffett loves, because, the
simpler the business model, the easier it gets to predict if their products are going
to stay relevant 10 years from now. 2. will the customer buy the product again
The second trait is, will the customer buy the product again and why? And this is remarkably
important because if you have the kind of a product that would sell once and the client
wouldn’t need it anymore, then your market is limited. A great product is when your clients
would keep coming back for it, every day or every week or even every year.
Like bread, if you are selling bread, you would expect the exact same customers to come
back tomorrow or next week over and over and 10 years from people would still need bread.
You might sell it in a different way, or a different form, you might improve the quality,
package it fancier, but it's still the same product that people would keep coming back
for. And that’s what makes iPhone by the way,
one of the greatest products in history because people kept coming back for it every September
even though it's not a necessity like bread. In fact, that’s the reason behind the subscription
business model, where the businesses would charge you a little fee every month like Netflix
for example or ever year like amazon prime. because its a more sustainable strategy.
But at the end of the day, it all comes down to how much value you get for that subscription.
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But Now, Lets get back to Warren Buffet.
3. Brand Name
And the 3rd component is the brand. People have the tendency to buy from the companies
that they feel connected to or familiar. Whos sneakers would you buy, the first ones
are from a brand that you have never heard of and the second ones are good old Nike's.
Even if they look fancier or, you probably would hesitate to buy them because you simply
haven’t heard of that brand before. On the other side, you easily recognize Nike, its
a well-established brand, you easily recognise it and they are known for making great sneakers.
You might already be wearing a pair of Nike shoes, so what would you chose.
And that’s why Buffett pays such important attention to how powerful is the brand name
before throwing his billions into that company. He understands how big of an of influence
it's going to have on the consumer's decision. In fact, if the brand is strong enough, consumers
would buy almost anything that company produces.
Warren Buffet is one of the major investors in Coca-Cola. In fact, he started investing
in Coca-Cola back in 1988, and his investments since then have grown by over 16 times.
And coca-cola one of the few companies that have all the traits Buffett look at before
considering investing. First of all, their business model, it's so
simple that anyone would understand it. what do they sell, a drink!
who are their potential customers? pretty much anyone who is thirsty! the entire
world! Is it a one-time product or their clients
would keep coming back for it every now and then? Of course they will keep coming back,
some people drink 4 or 5 cans a day. its a product that satisfies one of our most important
needs! and once you get used it, its addictive, its not easy to quite even if its unhealthy!
However, it has a lot of competitors, I mean the shops are filled with endless number of
soft drinks, they are so many of them that it seems like there is a new soft drink company
emerges every other day! but the coca cola brand name is so powerful that out of 20 or
30 options, you easily recognise it. Most people would probably pick Coca-Cola without
even thinking. and if its out of stock, you probably would
go to another store instead of choosing one of the 30 other options they have.
Think about it, 1.8 billion cans are sold every single day. If the company will earn
a single penny out of every can that why sell, that's 18 million dollars a day, or 6 570M
a year. But with such a powerful brand that they have, they can charge more than a penny
for every can.
Thats why Buffett bought 1 billion dollars of coca cola shares back in 1988. Its his
biggest investment, he was confident that 10, 20 or even 30 years later, this company
will just keep growing, regardless if the economy will crush, or another financial crises
is on a horizon. Let's take a look at another example. In 1989,
Warren invested 600 Million dollars in Gillette. The company that makes razors. If you give
it a closer look. Gillette holds the exact same position in its industry as Coca-Cola
does in beverages. They are like twin brothers.
Regardless of what happens, people will still shave. And their products are just filling
that basic human need. You don’t need to have an IQ of 150 to understand why people
are buying razors or while they will keep coming back for that product even 10 years
from now. But of course, Gillete isn’t the only company
in its insutry , it has a ton of competitors, however, if you ask people to name a razor
brand other than Gillette, 90% of people won't be able to do that.
Do you see how it perfectly matches with all the requirement that buffet has. Its a simple
product that people would keep buying and it has a strong brand name.
The exact same story repeats with See’s Candy. In fact, it has been one of his best
investments ever. Even though that the company wasn’t as profitable as buffett wanted,
it had an extremely strong brand, that made all the difference.
Buffet realized that people don't usually buy candy’s for themselves but usually as
gifts to others. So people would keep coming back for Chrismas,
valentine’s day, birthdays whatever. So, he acquired the company in 1972 for
25 Million dollars when it was making roughly 4 million dollars in profit. Since then, Company’s
profit increased 20 times over the next 35 years. In 2007, their profit exceeded 82 Million
dollars.
Buffett always stayed out of the tech world, but recently he massively invested in apple.
We live in an age where technology has become more of a need than want. And apple keeps
creating the type of tech that people keep coming back for. Apple has an army of fans
who update their iPhones every single year. Of course apple isn’t the only tech company
out there, but it definitely has the strongest brand name.
Of course you still have to look at the financial statement of the company, consider other factors
that will influence the future of the company. and each company has some unique circumstances,
but overall, these are the 3 most important factor to consider when you are thinking
where to throw your money in.
If you have found this video, helpful, give it a thumbs up and let me know if you want
to see more similar videos. Thanks for watching and until next time.