Warren Buffett is known for his successful investments in large companies that have stood the test of time. He has a set of principles and conditions that he follows when selecting companies to invest in. In this article, we will explore the common features of Warren Buffett’s core holdings.
Company of Endless Demand for Fast-Moving Consumer Goods
Warren Buffet has been known to invest in two main sectors: consumer goods and finance. However, his investments in consumer goods are mainly focused on fast-moving consumer goods, as opposed to durable or slow-moving consumer goods. Buffet has not invested in real estate or companies with longer replacement cycles.
Companies like Coca-Cola, which Buffet drinks several bottles of a day, and The Washington Post, which introduces a new product every day, as well as Procter & Gamble, Gillette, American Express, and their services and products, are all examples of fast-moving consumer goods that are part of Buffet’s core holdings. What sets these companies apart is that their products and services have a virtually endless lifecycle, as it’s hard to imagine Americans ever not drinking Coca-Cola or not using delivery services. This endless demand for fast-moving consumer goods is the first characteristic of Buffet’s core holdings.
This endless demand is driven by consumers’ constant need for these products and services in their daily lives. For example, people need to brush their teeth and shave every day, so they will always need toothpaste and razors. This consistent demand for fast-moving consumer goods ensures that the companies producing them will always have a steady stream of revenue.
Moreover, companies that produce fast-moving consumer goods often have strong brand recognition and customer loyalty. People tend to stick to the brands they know and trust, which makes it difficult for new companies to enter the market. This gives established companies a competitive advantage and a more predictable revenue stream.
In addition, fast-moving consumer goods tend to have lower price points, making them more accessible to a wider range of consumers. This means that these companies have a larger customer base, which again contributes to their steady revenue stream.
In conclusion, Buffett’s investment strategy is heavily focused on companies with an endless demand for fast-moving consumer goods. These companies have a predictable revenue stream, strong brand recognition, and a wide customer base, making them ideal for long-term investments.
Buy Big, Buy Old, Buy Monopoly
Warren Buffett’s investment strategy is well-known for its focus on buying big, old, and monopoly companies. He invests only in companies that are industry leaders and already dominating their respective markets. Buffett avoids entering into industries that are in the early stages of competition and focuses on companies that have already established a complete oligopoly in their markets.
Buffett’s portfolio comprises super-giants and absolute leaders of their respective industries. These are the companies that are often seen as having a lack of growth potential, but in reality, their stable internal systems and mechanisms, formed over years of operation, make them highly stable and profitable. Companies such as The Washington Post, Coca-Cola, Procter & Gamble, Gillette, and American Express are some of the big names in Buffett’s portfolio that have been around for decades and have a long-term life cycle.
Buffett has never held any small-cap or mid-cap stocks in his portfolio. He only invests in companies that have a long-term history and a proven track record. Buffett also avoids investing in companies that have not been in operation for a long time or don’t have a significant market presence. He only invests in companies that he is confident have a strong competitive edge in their markets and are likely to remain dominant for years to come.
In conclusion, Buffett’s investment strategy is to buy big, old, and monopoly companies. He invests only in companies that are industry leaders and have already established a complete oligopoly in their markets. This strategy has proven to be highly successful for Buffett, and it is a strategy that many investors can learn from.
Power of Simplicity
When it comes to the companies Warren Buffett invests in, they don’t rely heavily on science and technology. For example, Coca-Cola is simply a product that involves adding sugar to water and bottling it. There are no technological barriers, and while some may claim that Coca-Cola has a unique formula, every drink has its own formula and it’s not a complicated or mysterious process. American Express started as a delivery business, which also doesn’t require a lot of technology. Procter & Gamble and Gillette are the same.
Buffett invests in companies that are not complex and don’t rely on ever-changing technology. In fact, his core holdings have been operating for decades with a single product. None of his companies have undergone business transformation or moved into new industries. Instead, they focus on their simple and single product. This is particularly evident in Coca-Cola, where the production process hasn’t changed in nearly a century, and the company’s main product remains unchanged. Despite this, they have become a global beverage giant. Other companies in Buffett’s portfolio follow a similar strategy.
So, when it comes to investing, don’t overlook the power of simplicity. Investing in companies that have a clear and straightforward business model can be just as successful as investing in complex and innovative companies. Keep it simple, and you may see better long-term results.
Light Asset Companies is a Smart Decision
Operating heavy asset companies require massive resources and efforts in terms of manpower, finances, technology development, equipment investment, and factory construction. These resources are not necessary for companies that belong to the light asset category, which is where Warren Buffet invests most of his money. Light asset companies grow and expand their business with minimal investments. For instance, the Washington Post is a newspaper company whose cost includes office and journalist expenses, but as the number of newspapers increases, the costs don’t necessarily increase with it. The cost remains relatively fixed, even as the business scales up.
Charlie Munger once raised the question of how a tractor manufacturing company could grow its business. To expand, the company would have to spend money buying parts, constructing production lines, training employees, and building factories and equipment. However, it’s uncertain whether these tractors will sell or not. The company has to spend money to produce tractors, and if they want to increase production, they have to increase capital expenditure. This is why these types of companies struggle to grow.
Buffet also acknowledges this problem. He invests in stocks that don’t rely on massive capital expenditure, manpower, or financial investments. With minimal investment, or sometimes none at all, these companies can expand their revenue and profits. Thus, most of the increased revenue during the company’s development process turns into profit.
Take Coca-Cola, for example. Unlike the Washington Post, to increase Coca-Cola’s sales, the company must also increase its production workshops, factories, and raw materials. For instance, when Coca-Cola expanded its business to China, it had to build filling factories in the country.
Many chain enterprises, such as Walmart, Suning, and KFC, are historical growth stocks. They seem to require store expansion to increase business volume, but in reality, this expansion is risk-free replication. It doesn’t require innovative business models, technological innovation, or innovative management. It’s merely replicating the previously successful business model and production process in a new market. There is almost no risk in this expansion because it’s just replicating and reusing the previously accumulated successful advantages and methods that the market has fully verified.
Therefore, while this expansion requires additional costs to increase business volume, these costs are guaranteed expenses. The new store’s risk is minimal, and it shares all of the original company’s soft resources, such as information, brand, and management resources. Although there are some costs during the expansion process, it’s almost a smooth and successful replication, resulting in a high success rate.
In conclusion, spending some capital is necessary for the operation process of these assets, but it’s not a new risk. It’s just a repetition of the old business model. Once the product is available, it can immediately turn into a profit. These types of companies belong to the light asset category and are smart investment choices.
Buy Companies You Can Easily Access Everyday
Warren Buffett’s holdings consist of companies that he can access at any time. We noticed that none of the products or services provided by the companies in Buffett’s top holdings are difficult to access. In fact, they are products and services that you can come across every day. By simply wanting to know more about them, you can easily learn about their quality and accessibility, without any cognitive difficulties.
Here’s a day in the life of Warren Buffett:
In the morning, he gets up and heads to the bathroom where he uses Procter & Gamble Gillette products for grooming. Afterwards, he heads to the dining room where he drinks a bottle of Coca-Cola and eats a hamburger. He then picks up a copy of The Washington Post to read the news of the day. Later on, Buffett goes out to run some errands.
During his errands, he uses his American Express card for payment and processes his funds at Wells Fargo Bank. In this simple and ordinary day, Buffett conveniently, and even inevitably, comes into contact with all of the products and services provided by the companies he has invested heavily in.
Many investors believe that Buffett’s long-term investment success is due to him becoming a director of the companies he invests in. While there may be some truth to this, it’s important to note that Buffett was not a director of any of the companies he initially invested in. When he first buys into a company, he invests heavily, and it’s clear that his decision was made before he became a director of the company. He made these strategic decisions as an ordinary investor.
So why is the quality of Buffett’s investment decisions as an ordinary investor so high? It’s because the companies he invests in are easily researchable, understandable, and accessible. These are some of the characteristics that allow Buffett to make informed judgments and avoid cognitive errors. This is something that we should all take note of.
Buying Companies with Simple Upstream and Downstream Relationships
Buffett’s investment in heavily-weighted stocks shows that the upstream and downstream relationships of these companies are very simple. None of the companies in his portfolio are in the middle of a very long and complex industrial chain.
Take Coca-Cola for example. Its main ingredients are water and sugar, which are not subject to scarcity or complex supply and demand changes. Sugar is a basic commodity that can be produced globally, and it is unlikely to be monopolized by a single company. Therefore, Coca-Cola is not subject to the constraints of upstream suppliers, and if one supplier has problems, a new one will soon replace it. This is the advantage of having a short industrial chain.
We can take a look at how the Chinese milk industry’s melamine incident and the clenbuterol incident in the pork industry directly affected the companies that produced these products, as their supply chains were complex and uncontrollable. Companies like The Washington Post, American Express, and other heavily-weighted companies do not have raw material suppliers and do not rely on complex production processes to make a profit. They are pure service providers, and the elements of their business are all social basic elements that are unlikely to experience significant risks.
During the financial crisis, many machinery manufacturing companies experienced difficulties due to a significant decrease in demand and the inability to convert inventory quickly. This resulted in a significant loss in the value of raw materials and caused damage to the companies that were part of a long and complex industrial chain.
In contrast, Buffett’s heavily-weighted stocks do not face this issue, as all of their downstream consumers are directly facing the general public, and these products are essential. No matter what changes occur in society, the products provided by these companies are not easily affected. This creates a stable operating environment for these companies, and they do not depend on complex supply chains. This is an important characteristic of Buffett’s heavily-weighted stocks.