1. The company has long-term value
Buffett looks for businesses that will continue to have a competitive advantage decades down the line, not just in the moment. “Nobody buys a farm based on whether they think it’s going to rain next year,” he said on “Squawk Box” in 2018. “They buy it because they think it’s a good investment over 10 or 20 years.”
For example, he purchased See’s Candies with longtime business partner Charlie Munger in 1972 and spent more than $1 billion on Coca-Cola stock in 1988 — both of which turned out to be good bets he still owns today.
“Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value,” Buffett wrote in his 1996 letter to shareholders. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
2. He understands how the business works
Buffett doesn’t put money into anything he doesn’t understand. “You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside,” Buffett told Quick in February.
That’s because it’s crucial for investors to be able to confidently assess the businesses they hold. “Intelligent investing is not complex, though that is far from saying that it is easy,” Buffett wrote in his 1996 annual shareholders’ letter. “What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence.
“The size of that circle is not very important; knowing its boundaries, however, is vital.”
You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside.
CEO of Berkshire Hathaway