Business Perspective Investors start from the premise that there is no philosophical distinction between part ownership (i.e. buying shares in a company) and outright ownership (i.e. buying the business in its entirety). All we are looking for is pieces of businesses to buy at the right price.
Warren Buffett put it thus:
“Stocks are simple. All you do is buy shares in a great business for less than the business is intrinsically worth, with managers of the highest integrity and ability. Then you own those shares forever.”¹
Criteria for Stock Selection
It follows that there are several important criteria that companies selected for investment consideration must exhibit in abundance.
Among these are that:
Their business model is easily comprehensible;
They produce transparent financial statements;
They demonstrate consistent operational performance with earnings being relatively predictable;
They generate high returns on capital employed;
They convert a high proportion of accounting earnings into free cash;
Their balance sheet is strong without unduly high financial leverage;
Their management is focused on delivering shareholder value and is candid with the owners of the business;
Their growth strategy is more likely to rely on organic initiatives than frenetic acquisition activity.
Buy when the Odds are in Your Favour
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause their share prices to be misappraised. Again as Buffett puts it, “Price is what you pay, value is what you get”.² Having identified a universe of truly outstanding companies, we must wait until their shares can be bought at a price on the stockmarket that is substantially less than their true economic worth.
¹ Warren E. Buffett, Forbes, 6 August 1990
² Warren E. Buffett, Letter to Partners (Buffett Partnership), July 1966
Reference to material that may be subject to copyright is reproduced for the purpose of review under the fair dealing exemption.