Warren Buffett noticed that because Graham got rid of the stocks so quickly, many of his “undervalued stocks” stayed undervalued. A handful of companies that Graham and Warren purchased that were sold under the 50% rule continued to grow and prosper year after year. The prices went up way above where they had been when Graham sold them.
As a result, Warren studied the financial statements of the companies that performed well. Warren learned that these all stars all shared the following strengths:
1) They sell a unique or service
2) They are the low-cost buyer and seller of a product
Selling a unique product: Coca-Cola. The producers of these products have placed the stories of their products in our minds. When you hear someone open up a Coke bottle, you think of a remedy of thirst.
Selling a unique service: Moody’s Corp. People need the services and are paying for it. It is instituational specific, and not people specific. A company does not have to spend big bucks redesigning its products.
Being the low-cost buyer: Nebraska Furniture Mart in Omaha. It is the low-cost buyer and seller. Their margins are traded for volume. The great volumes makes up for any decrease in margins.
These wonderful business attributes work in the companies’ favour, and there is very little chance of them going bankrupt.
Warren came up with the idea that one would purchase these stocks with such attributes and hold onto them faithfully.
How Warren do it?
Warren invested $11 million in the Washington Post. He had been holding onto the stock till today. It had been 35 years. The stock’s worth has grown to $1.4 billion. Can you imagine? Invest $11 million and make $1.4 million. Oh, and Warren never sold a single share, so he hasn’t paid a dollar of taxes on his profits.
So it’s easy as ABC. Buy something that has long lasting attributes and be faithful to it.