{"id":17703,"date":"2023-04-21T23:56:00","date_gmt":"2023-04-21T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=17703"},"modified":"2024-07-12T18:01:41","modified_gmt":"2024-07-12T10:01:41","slug":"high-profit-companies","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/","title":{"rendered":"How does Buffett select high-profit companies?"},"content":{"rendered":"\n<p>High-profit companies are actually very ordinary, which is beyond the imagination of most investors.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#Do_the_same_business_for_many_years\" >Do the same business for many years<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#Low_debt\" >Low debt<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#Support_from_objective_data\" >Support from objective data<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#High-profit_companies_are_from_ordinary_industries\" >High-profit companies are from ordinary industries<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#Related_content_in_my_book\" >Related content in my book<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Do_the_same_business_for_many_years\"><\/span>Do the same business for many years<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buffett mentioned in his <a href=\"https:\/\/berkshirehathaway.com\/letters\/1987.html\" target=\"_blank\" rel=\"noreferrer noopener\">1987 shareholder letter<\/a>: <em>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.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Low_debt\"><\/span>Low debt<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Most use very little leverage compared to their interest-paying capacity. Really good businesses usually don&#8217;t need to borrow.<\/p>\n\n\n\n<p>In Buffett&#8217;s <a href=\"https:\/\/berkshirehathaway.com\/letters\/1982.html\" target=\"_blank\" rel=\"noreferrer noopener\">1982 shareholder letter<\/a>, &#8220;businesses earning good returns on equity while employing little or no debt,&#8221; was listed as one of the six major criteria for Berkshire to acquire any company. (Please refer to my blog article &#8220;Buffett&#8217;s Acquisition Criteria&#8221;).<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Support_from_objective_data\"><\/span>Support from objective data<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Buffett mentioned in his <a href=\"https:\/\/berkshirehathaway.com\/letters\/1987.html\" target=\"_blank\" rel=\"noreferrer noopener\">1987 shareholder letter<\/a>: <em>The Fortune study I mentioned earlier supports our view. Only 25 of the 1,000 companies met two tests of economic excellence &#8211; 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&amp;P 500.<\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"High-profit_companies_are_from_ordinary_industries\"><\/span>High-profit companies are from ordinary industries<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p> The Fortune study mentioned above: <em>Except for one company that is &#8220;high-tech&#8221; 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. <\/em><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_content_in_my_book\"><\/span>Related content in my book<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In section 2-2 of my book &#8220;<a href=\"https:\/\/www.books.com.tw\/products\/0010889106?sloc=main\" target=\"_blank\" rel=\"noreferrer noopener\">The Rules of Super Growth Stocks Investing<\/a>&#8220;, on page 87 there is the following paragraph:<\/p>\n\n\n\n<p>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&#8217;s economic competitive advantage, and more importantly, the competitive advantage must have Durability, the trick is trying to figure out it&#8217;s doing the same business now as it was 10 years ago, why?<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>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.<\/li>\n\n\n\n<li>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.<\/li>\n\n\n\n<li>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&#8217;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<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"157\" height=\"98\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2023\/02\/profitable-1600x1200-1.jpg\" alt=\"\" class=\"wp-image-17704\"\/><figcaption class=\"wp-element-caption\">credit: businessfocus.co.ug<\/figcaption><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"block-9d402b81-75c9-41fa-9a2d-6be1252e074e\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/27\/buffett-portfolio\/\" target=\"_blank\" rel=\"noreferrer noopener\">The commonalities of Buffett portfolio \u2013 cheap, fixed income, repurchase<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/27\/predictabe-buffetts\/\">Predictabe is Buffett&#8217;s favorite type of business to invest in<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/21\/high-profit-companies\/\">How does Buffett select high-profit companies?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/03\/20\/long-term-investment\/\">How Buffett Structures His Long-Term Investment Portfolio<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/08\/17\/possibility-of-long-term\/\">Possibility of long-term holdings, Deep dive on Buffett&#8217;s case<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/27\/survivorship-bias\/\" target=\"_blank\" rel=\"noreferrer noopener\">People believe successful investors are survivorship bias cannot succeed<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/07\/buffett-deserves-study\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why Buffett deserves further study?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/12\/07\/buffett-investment-idea\/\">What helps Buffett to get his investment idea?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/06\/17\/wells-fargo\/\">Wells Fargo, a major holding once praised by Buffett and Munger<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/01\/08\/2022-sp-500-constitutent-stock-performance\/\">2022 S&amp;P 500 Constitutent Stocks Performance<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/12\/17\/dear-shareholder\/\">Dear Shareholder<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/07\/27\/survivorship-bias\/\">People believe successful investors are survivorship bias cannot succeed<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2023\/04\/09\/buffetts-acquisition-criteria\/\">Buffett&#8217;s Acquisition Criteria<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>High-profit companies are actually very ordinary, which is beyond the imagination of most investors<\/p>\n","protected":false},"author":1,"featured_media":17704,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11,181,28],"tags":[],"class_list":["post-17703","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-buffett","category-debt","category-us-stock-market"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17703","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=17703"}],"version-history":[{"count":18,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17703\/revisions"}],"predecessor-version":[{"id":19707,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/17703\/revisions\/19707"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/17704"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=17703"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=17703"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=17703"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}