AAII Stock Ideas: The Warren Buffett Way

Previously Unexplained Techniques Explained

Investing in a Business

  • The firm has low profit margins (net income divided by sales);
  • The firm has low return on equity (earnings per share divided by book value per share);
  • Absence of any brand-name loyalty for its products;
  • The presence of multiple producers;
  • The existence of substantial excess capacity;
  • Profits tend to be erratic; and
  • The firm’s profitability depends upon management’s ability to optimize the use of tangible assets.
  • Businesses that make products that wear out fast or are used up quickly and have brand-name appeal that merchants must carry to attract customers. The best example is Coca-Cola. The product is an item that grocery stores, restaurants and other venues must carry. Other examples include drug companies with patents or even popular brand-name restaurants such as McDonald’s.
  • Communications firms providing services that businesses must use to reach consumers. All businesses must advertise to reach potential customers. Today, worldwide telecommunications networks and platforms such as Google and Facebook fall into this category.
  • Businesses providing consumer services that are always in demand. Most of these services require little in the way of fixed assets. Examples include tax preparers, insurance companies, lawn care services and investment firms.

Historical Earnings Growth Approach

Sustainable Growth Approach

Conclusion

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American Association of Individual Investors

American Association of Individual Investors

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Since inception in 1978, the nonprofit AAII has helped over 2 million individuals build their investment wealth through programs of education and publications.