How Does Buffett Buy Stocks?

In the 2003 letter to shareholders, Buffett mentioned how Berkshire buys stocks.

How Buffett Buys Stocks

When Charlie and Buffett buy stocks, they believe they are purchasing a small part of a business. Therefore, their analysis of buying stocks is very similar to that of acquiring an entire business.

First, they assess whether they can reasonably estimate the company’s profit level over the next five years or longer and determine a rough range. If the answer is yes, and the stock’s market price is still reasonable relative to the lower end of their estimated profit range, they will buy it.

In many cases, they cannot estimate the company’s future profitability, so they move on to study other promising opportunities.

In their 54 years of partnership, they have never abandoned attractive opportunities due to macro or political environmental factors because they are micro fundamental investors.

Many individual investors rely on savings from their jobs to invest and have never participated in corporate acquisition activities. How can they analyze a company as if buying an entire business?

My suggestion is to refer to bond rating reports of companies in the same industry to see how rating agencies analyze the industry and the company’s fundamentals. Additionally, when mergers and acquisitions occur in the industry, it’s an important moment to learn about industry knowledge and fundamentals. Gathering relevant information can help understand the entire industry.

Of course, you can also refer to how Buffett conducts stock research.

How Buffett Researches Stocks

Buffett said: “I focus on one industry at a time. For that industry, I spend about two weeks trying to understand every aspect of it, accumulating the necessary knowledge to form my personal insights. I don’t blindly rely on any ‘common sense’ or ‘conventional wisdom,’ as these are likely hearsay and misleading without actual basis. I need to examine all the characteristics and traits of the industry myself to feel assured.”

“For example, if I’m studying an insurance company or a paper mill, I’d imagine that I’ve just inherited this business and it’s the only asset I have. I have no choice but to run this company. I’d ask myself: What should I do in this situation? What questions should I consider? What should I worry about? Who are my competitors? What kind of customers do I have? After finding the answers, I’d step out of the office and talk to my customers, competitors, and other relevant people. I’d compare the strengths and weaknesses of this business relative to its competitors. If you can do all this, you’ll gain a deep understanding of the company’s operations and business—perhaps even deeper than its management.”

This is Buffett’s research method, and I’m also exploring and applying it.