Adam Smith: If a younger Warren Buffett (Trades, Portfolio) were coming into the investment field today, what areas would you tell him to point himself in?
Warren Buffett (Trades, Portfolio): Well, if he were doing – if he were coming in and working with small sums of capital I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities and that bank of knowledge will do him or her terrific good over time.
Smith: But there’s 27,000 public companies.
Buffett: Well, start with the A’s.
I believe most of the readers are familiar with the “start with the A’s” advice from Warren Buffett (Trades, Portfolio). However, can you really start with the A’s with 27,000 companies?
I doubt it. Let’s do the big picture math. Assuming on average, one needs 10 hours to get familiar with a company. Then studying 27,000 companies requires 270,000 hours, the equivalent of 11,250 days and almost 31 years even if one utilizes all 24 hours a day solely on research. If an investor can only spend 3 hours a day on research, it will take him or her approximately 250 years to study every public company available in the U.S. Let’s not forget that the number of publicly traded company has gone up since then.
Granted, Buffett used a very quantitative approach in his early years so it may only take him not even 5 minutes to go through a company on Moody's manual. And to be fair, I think this approach may still work and will enable one to study considerably more companies than a qualitative based approach.
But the investing world has changed. The number of companies that fit Graham's quantitative screen has shrunk significantly. Under today's market condition, it would be foolish to mindless follow Mr. Buffett’s advice.
What if I told you we don’t have to study 27,000 companies to achieve superior returns. Heck, I would say 90%-95% of the companies are not even worth a minute. I think what makes most sense is simplifying the problem by making a list of the companies you want to study and then start with the A’s. This list may change over time, depending on the strategy that suits best with your temperament. I like businesses with a moat around it so my list includes high quality businesses that I can understand. You may prefer the net net approach so your list may include all publicly traded companies priced below net tangible book value.
Once we have created our own list, then we can comfortably start with the A’s.
Here is how I came up with my list. Morningstar has a wide moat list and I use this list as my starting point. Morningstar’s list includes the following companies that start with Alphabet A.
Accenture PLC
Adobe Systems Inc
Allergan, Inc.
Altria Group Inc.
Amazon.com Inc
Ambev SA
American Express Co
AmerisourceBergen Corp
Amgen Inc
Analog Devices Inc
Anheuser-Busch Inbev SA
Applied Materials, Inc.
ARM Holdings PLC
AstraZeneca PLC
Autodesk, Inc.
Automatic Data Processing
Based on my personal experiences, I then added the following 4 companies in addition to Morningstar’s list:
Apple Inc
Advanced Auto Parts
Abbott Laboratories
AbbVie Inc
The next step involves simplification and elimination. I would cross out the companies that are out of my circle of competence (such most pharmceutical and bio tech companies) , companies that are too complicated, companies that are subject to rapid change and companies subject to potential material adverse regulation. This is what happens after I apply the filters:
Accenture PLC - keep
Adobe Systems Inc - eliminate, subject to rapid change
Allergan, Inc - eliminate, out of circle of competence
Altria Group Inc - eliminate, subject to potential material adverse regulation
Amazon.com Inc - keep
Ambev SA - keep
American Express Co- keep
AmerisourceBergen Corp - eliminate, out of circle of competence
Amgen Inc - eliminate, out of circle of competence
Analog Devices Inc - eliminate, subject to rapid change
Anheuser-Busch Inbev SA - keep
Applied Materials, Inc - keep
ARM Holdings PLC - eliminate, subject to rapid change
AstraZeneca PLC - eliminate, out of circle of competence
Autodesk, Inc - eliminate, out of circle of competence, also subject to rapid change
Automatic Data Processing - keep
Apple Inc - keep, but keep a close eye on
Advanced Auto Parts - keep
Abbott Laboratories - eliminate, out of circle of competence
AbbVie Inc - eliminate, out of circle of competence
After this round of simplification and elimination, I’ve narrowed my list down to 9 companies that start with A. It still takes a good amount of time to study these companies extensively but it won't take years.
Again, every value investor should find the approach that suits best with his or her own personality so what works for me may not work for you. The idea is to build a list of companies that you feel comfortable with and know them really well. As Buffett said, “that bank of knowledge will do him or her terrific good over time.”
So my advice to you: come up with a list of a companies that fits your temperament and style, then start with the As.
