How does Buffett select high-profit companies?

High-profit companies are actually very ordinary, which is beyond the imagination of most investors.

Table of Contents

Do the same business for many years

Buffett mentioned in his 1987 shareholder letter: Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.

Low debt

Most use very little leverage compared to their interest-paying capacity. Really good businesses usually don’t need to borrow.

In Buffett’s 1982 shareholder letter, “businesses earning good returns on equity while employing little or no debt,” was listed as one of the six major criteria for Berkshire to acquire any company. (Please refer to my blog article “Buffett’s Acquisition Criteria”).

Support from objective data

Buffett mentioned in his 1987 shareholder letter: The Fortune study I mentioned earlier supports our view. Only 25 of the 1,000 companies met two tests of economic excellence – an average return on equity of over 20% in the ten years, 1977 through 1986, and no year worse than 15%. These business superstars were also stock market superstars: During the decade, 24 of the 25 outperformed the S&P 500.

High-profit companies are from ordinary industries

The Fortune study mentioned above: Except for one company that is “high-tech” and several others that manufacture ethical drugs, the companies are in businesses that, on balance, seem rather mundane. Most sell non-sexy products or services in much the same manner as they did ten years ago (though in larger quantities now, or at higher prices, or both). The record of these 25 companies confirms that making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics.

Related content in my book

In section 2-2 of my book “The Rules of Super Growth Stocks Investing“, on page 87 there is the following paragraph:

Buffett recommends that investors use whether the company has a moat to help them screen for stocks. The point is not to analyze how much impact an industry will have on society, or how much it can grow; It is to judge the company’s economic competitive advantage, and more importantly, the competitive advantage must have Durability, the trick is trying to figure out it’s doing the same business now as it was 10 years ago, why?

In fact, 10 years is not a short period of time. The company has enough time to correct existing problems and develop its own profit model, which is enough to prove that the company has the ability to continue on the right path.
Companies that can survive 10 years have a solid foundation. If they keep doing the same thing in the future, the chances of error are low.
Think about it, 10 years from now, will Dairy Queen (a well-known American ice cream chain founded in 1940 and become a wholly owned subsidiary of Berkshire in 1998) selling ice cream or a software company continue to exist ? Dairy Queen’s Ice Cream has been in existence for 80 years, proving that it has survived countless business difficulties and defeated countless strong competition or challengers during these 80 years. However, the current software start-up companies are like fledgling newcomers in society, they must show their real ability to make money in society, and time will prove their viability

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