At Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) 2003 annual meeting of shareholders, one investor asked Warren Buffett (Trades, Portfolio) how he went about finding excellent companies to buy for the conglomerate's equity portfolio.
This is a question we would all like a simple answer to. Unfortunately, there's no set template investors can follow to replicate the Oracle of Omaha's performance. It requires time and effort to understand the market and the businesses that make up the major indexes.
And that's just what Buffett told his questioner in 2003. Specifically, he started his response by saying:
"The investment business is a business where knowledge cumulates. I mean, everything you learn when you're 20 or 30 — you may tweak some as you go along, but it all kind of builds into a knowledge base that's useful forever."
Building this knowledge base is critical for investors who want to understand more about the businesses they are reviewing. It's far more critical to understand the fundamentals and how they fit into the rest of the sector than relying on projections and management's outlook. As Buffett went on to add:
"But we don't give a hoot about anybody's projections. We don't even want to hear about them, in terms of what they're going to do in the future. We've never found any value in anything like that...
But you want to read Fortune, you know. You want to read lots of annual reports. You really want to have a database in your mind so that you can tell what kind of a business you're looking at, in general, by looking at the figures."
As the Oracle of Omaha explained, investors can use this approach to uncover attractive looking businesses, and when they find them, it is best to act quickly and with conviction.
However, not every single business will be a home run, and that's ok. As Buffett continued, investors don't have to be right on 20% of the world's companies or even 10%. They only need one or two good ideas every single year.
To put it another way, the best way to pick stocks is to ignore most of them, according to Buffett. He added that if someone asked him to predict how all 500 stocks in the S&P 500 would behave, "I don't know how I would do." However, if he were asked to pick one, Buffett said he might be able to find one equity where he had a "90% chance" of being right about its growth.
That is investors' most significant advantage, he added - "you only have to be right on a very, very few things in your lifetime as long as you never make any big mistakes."
For investors who're looking for a simple road map to follow to success, this won't provide an answer. However, that is not the point. Investing is a marathon and not a sprint. Some investors might make a lot of money very quickly with one trade, but it's harder to stay ahead over the long term.
Buffett's approach is designed to help him stay ahead. He's not looking for the next hot stock tip all the time. Instead, he has tried to build a framework and the knowledge required to stay with good businesses.
As he noted in 2003, investors only have to be right on a few things to be successful. Sticking and staying on this course is far more important than finding new ideas every single day.
By getting a little smarter every day, investors can significantly improve their odds of finding great companies and, more importantly, staying with these firms.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
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- Why Berkshire Hathaway Continues to Own Struggling Businesses
- A Look at Berkshire Hathaway Energy's Performance in 2020
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