Warren Buffett’s investment philosophy has shaped decades of market wisdom, making him one of the most closely watched investors of all time. His leadership at Berkshire Hathaway has transformed it into a powerhouse, delivering staggering long-term returns. Since Buffett took over, Berkshire’s per-share market value has skyrocketed by 5,502,284%, dwarfing the S&P 500’s 39,054% gain.
Given this track record, investors analyze his every move, hoping to uncover insights into his strategy. While Buffett remains tight-lipped about specific trades—some of which are now executed by his trusted deputies—his latest shareholder letter once again underscores a fundamental truth: Buffett isn’t looking for just cheap stocks. He wants great businesses, and he’s willing to pay a fair price for them.
Quality Over Bargains: The Buffett Doctrine
Buffett has long dismissed the idea that simply buying undervalued stocks is enough. A low price alone doesn’t make a stock a good investment. He famously wrote, “It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.”
For Buffett, a company must first and foremost be an outstanding business. He highlighted four such businesses in this year’s annual letter—American Express, Coca-Cola, Apple, and Moody’s—calling them “very large and highly profitable businesses with household names.” These are among what he considers “a dozen or so” great businesses that Berkshire Hathaway owns a stake in.
But what exactly makes a business great in Buffett’s eyes?
Buffett’s Core Criteria for a Great Business
Buffett zeroes in on companies that generate high returns on net tangible equity. In simple terms, these businesses use their physical assets efficiently to churn out profits. Yet, there’s an even more important factor—an intangible asset that doesn’t show up on balance sheets but is invaluable: brand strength.
Take Apple. It has built an entire ecosystem around its products, cultivating intense customer loyalty. With every product upgrade, Apple users willingly pay a premium, ensuring a steady revenue stream. This isn’t a company that has to keep reinventing itself—its foundation is already rock solid.
Coca-Cola operates on a similar principle. The core product has remained largely unchanged for more than a century, yet its brand name continues to drive strong sales. Buffett often pairs Coca-Cola with American Express, another company that thrives on a recognizable brand and a built-in recurring revenue model through membership fees.
Then there’s Moody’s, a financial services firm with a stronghold in credit ratings. It’s not a household name like the others, but within its niche, it dominates. With few competitors, Moody’s enjoys consistent demand and reliable earnings.
The Common Thread: Stability and Resilience
Despite operating in different industries, these businesses share crucial similarities:
- They withstand economic downturns. Customers continue using their products or services regardless of market cycles.
- They generate consistent profits. A strong market position allows them to maintain solid margins and cash flow.
- They reward investors with dividends. Each of these companies pays out dividends, a hallmark of financial health and long-term stability.
These aren’t the flashy, high-growth stocks that dominate headlines, but they have something arguably more valuable: durability. Buffett favors businesses that can weather storms, steadily compounding returns over time.
Slow and Steady Wins the Race
Buffett’s approach may seem old-fashioned in an era where speculative bets and tech unicorns grab attention. Yet, his strategy continues to prove its worth. His chosen stocks may not always offer the thrill of overnight gains, but they deliver something far more important—enduring value.
As investors chase the next big thing, Buffett’s portfolio serves as a reminder that sometimes, the best opportunities aren’t found in the latest hype but in businesses that have already stood the test of time.
