Predictabe is Buffett’s favorite type of business to invest in

In his 1989 Berkshire shareholder letter, Buffett revealed predictabe business his favorite types of businesses to invest in.

Predictabe is important for businesses

Gillette’s business is very much the kind we like. Charlie and I think we understand the company’s economics and therefore believe we can make a reasonably intelligent guess about its future. (If you haven’t tried Gillette’s new Sensor razor, go right out and get one.) However, we have no ability to forecast the economics of the investment banking business (in which we have a position through our 1987 purchase of Salomon convertible preferred), the airline industry, or the paper industry.

This does not mean that we predict a negative future for these industries: we’re agnostics, not atheists. Our lack of strong convictions about these businesses, however, means that we must structure our investments in them differently from what we do when we invest in a business appearing to have splendid economic characteristics.

In one major respect, however, these purchases are not different: We only want to link up with people whom we like, admire, and trust.

Sustainability and long-term competitiveness

In Berkshire’s shareholder letter in 1991, Buffett further used the following text to describe the investment goals he continued to seek, among which “sustainability” and “long-term competitiveness” were the key points he pointed out.

We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements. This focus doesn’t guarantee results: We both have to buy at a sensible price and get business performance from our companies that validates our assessment. But this investment approach – searching for the superstars – offers us our only chance for real success. Charlie and I are simply not smart enough, considering the large sums we work with, to get great results by adroitly buying and selling portions of far-from-great businesses. Nor do we think many others can achieve long-term investment success by flitting from flower to flower. Indeed, we believe that according the name “investors” to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a romantic.

If my universe of business possibilities was limited, say, to private companies in Omaha, I would, first, try to assess the long-term economic characteristics of each business; second, assess the quality of the people in charge of running it; and, third, try to buy into a few of the best operations at a sensible price. I certainly would not wish to own an equal part of every business in town. Why, then, should Berkshire take a different tack when dealing with the larger universe of public companies? And since finding great businesses and outstanding managers is so difficult, why should we discard proven products? (I was tempted to say “the real thing.”) Our motto is: “If at first you do succeed, quit trying.”

In line with his acquisition criteria

In my blog post of “Buffett’s Acquisition Criteria“, I mentioned that Buffett announced Berkshire’s M&A criteria every year for many consecutive years starting from Buffett’s 1982 shareholder letter. (2) Sustained and stable profits (we are not interested in companies with prospects or turning points), which refers to the predictability of the future of the company.

Related content in my book

In my book “The Rules of Super Growth Stocks Investing“:

  • In subsection 2-1, page 79: Whether the profit of the enterprise is sustainable.

In my book “The Rules of 10 Baggers“:

  • Section 1-2, pages 29-37: The key to getting rich in the stock market lies in “time” and “sustainability”
  • In subsections 2-3, pages 94-97: Most of the good performances of 10 times stocks are “sustainable”

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