The stock market may have rebounded after its market crash, but there are still a large number of companies trading at relatively attractive valuations, in my opinion.
Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) Chairman Warren Buffett (Trades, Portfolio)’s advice is to adopt a simple strategy and focus on the quality of a business, which could help you to identify the most promising investment opportunities currently available.
A simple strategy
Using a simple strategy to analyze stocks is overlooked by some investors in favor of a more complicated strategy. This can be due to a variety of reasons, including a trend among professional investors towards relying on methods that are centered on statistical models. However, a complex investment strategy is not guaranteed to produce superior results compared to a simple strategy.
This standpoint has been central to Warren Buffett (Trades, Portfolio)’s past investment success, with the Oracle of Omaha once stating, “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective."
Focus on quality
Value investing is about much more than just the price of a stock. All too often, a company may be cheap for a good reason, such as having a weak balance sheet. According to Buffett, investors should consider the quality of a business alongside its price, because “Price is what you pay. Value is what you get."
A competitive advantage
Determining the size of a company’s economic moat is one of the main areas that Buffett focuses on when analyzing companies. Simply put, an economic moat is a lasting competitive advantage over peers. A business may, for example, have a unique product or a dominant market position.
As a long-term investor, Buffett concentrates on the potential for a company’s economic moat to remain in place in the future:
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Analyzing the size of a company’s economic moat is highly subjective. However, investing in dominant businesses with a long track record of sustained growth could catalyze your portfolio’s performance.
Paying a premium
Instead of trying to find the cheapest stocks that are available, Buffett aims to buy the best companies while they trade at attractive prices. This may mean that he buys companies that trade on a premium valuation compared to their peers. However, “It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
Accepting that it is not always possible to buy quality companies at rock-bottom prices could help you avoid losing opportunities. Stronger businesses may be less likely to struggle during weak economic periods, while their market dominance may lead to higher levels of profitability when trading conditions become more favorable.
Disclosure: The author has no position in any stocks mentioned.
Read more here:
- Peter Lynch on Managing Your Portfolio in a Crisis
- Howard Marks on Trying to Predict the Stock Market's Future
- Buffett, Marks and Klarman on Taking Advantage of the Market Crash
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