Multi-billionaire investor Warren Buffett is known for his patience in finding a good stock.
In his early days, he may have looked through distressed and beaten-down stocks to find something that had just a whiff of value at a deeply discounted price, what he called "a cigar butt" stock. It was only good for one puff, but you got it for next to nothing sometimes.
Later on, he learned that much more could be earned by concentrating on quality companies. Now, you can start investing like Warren Buffett with these three simple steps-
1) Look for quality companies that can generate great amounts of earnings.
You want to see clear and substantial earnings growth in the past. The company should be a business that you can readily understand from your own skills and experience.
2) Identify what competitive advantages could keep them going for a long time.
Is there a strong brand name that can attract a premium, or is it a low-cost producer that can survive better than its competitors? Does something protect the company from a lot of competition?
3) If they aren't attractively priced now, get ready to buy during a market sell-off, or when an individual company stumbles into trouble.
If an attractive company's stock is priced to the heavens, it may not make "business sense" to buy it. You always need a margin of safety in case the market turns down and your stock falls. That's why you get busy during a market sell-off. It is supplying the margin of safety you require. If a good company has a bad year (or two), the market will sell it down and possibly open an opportunity.
— Coca-Cola Amatil Ltd (ASX: CCL)
The bottler and distributor of the world's most famous soft drink has a strong brand and exclusive rights in Australia and four other countries. It has steadily grown earnings in the past, but recently has flagged weakness. That sent the share price down from about $15 to just a little above $9.25.
It is restructuring itself to improve margins and cut costs, so now may be a good time to have a position – while the stock is still down – as the benefits come out in the mid-term.
— QBE Insurance Group Ltd (ASX: QBE)
Once an earnings powerhouse before the GFC, the international general insurer was a very popular stock. Profits have slipped since then, but the company is restructuring and is planning to exit from less profitable businesses.
The insurance industry has been improving over the past two years, so if management can turn things around now, the stock could begin to rise along with a market tailwind. The share price is around $10.85, which is a little above multi-year lows. This may be the opportunity that makes business sense.
