Investors looking to turn a quick profit may be tempted to buy into Bitcoin or invest in pot stocks. However, for those looking for long-term stability, value investing can provide you with some much-needed security, and there’s no one better to model your approach after than Warren Buffett.
Not only does he look at quantitative measures like price-to-earnings and book-value multiples, but there are important qualitative characteristics that factor into his decision making as well. There was one thing that stood out to me when learning about Buffett’s approach to investing.
In addition to evaluating a company’s moat and the strength of its competitive advantage (assuming a company has one), Buffett looks at the long-term stability of a company and has an interesting way of doing so.
To gauge how stable the company’s long-term success is, he asks one question:
“Will the internet change the way the product is used?”
It’s a very simple and quick assessment that can put into perspective how the company might be affected by technological changes. A product that can see significant change might not be a good long-term investment, whereas one that won’t change will provide investors with a great deal of stability.
The example he likes to use is The Coca-Cola Co (NYSE:KO), a company that has been around for years and likely will continue to be for the foreseeable future. The way that the company’s products are used and consumed has not changed, even though we’ve seen significant technological changes over the years.
Meanwhile, a company like Apple Inc. (NASDAQ:AAPL) that is in the business of developing phones and emerging technologies presents a lot more instability over the long term. That’s not to say that it isn’t a great investment (and it’s actually in Buffett’s portfolio), but over the long term, there is a danger that its products will become obsolete, as new technologies continue to emerge.
A product that will have a lot of consistency in its use has “persistent demand,” and that makes the stock a great long-term buy.
While this would likely blacklist tech stocks as a whole and leave investors missing out on significant gains, it would also protect investors from significant risk and volatility. BlackBerry Ltd. (TSX:BB)(NYSE:BB) is a good example of how a lack of demand would have made the once popular cellphone maker nearly obsolete, if not for its reinvention and focus on self-driving technologies.
The problem with tech stocks is the need to always innovate, or they face becoming dated and irrelevant. It should come as no surprise then that Buffett is not a fan of the Bitcoin craze.
It’s important for investors to consider more than just numbers when investing, as often the most important things you can assess and analyze about a company are qualitative features that cannot be computed. When you’re investing, you are ultimately buying a piece of a company, and you should understand the business model and where it’s likely headed.
Buffett’s method of investing may not be ideal for everyone; after all, he prefers to hold stocks forever.
It's not Apple. Or Google. Verizon or AT&T. In fact, you've probably never even heard this company's name. Yet it's so vital to the "smartphone" revolution that its shares have doubled time and time again since they first hit the shelves. And if industry insiders are right, the rapidly escalating war between iPhone and Android is about to push this stock even higher.
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Fool contributor David Jagielski has no position in any of the stocks mentioned. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple and BlackBerry and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. BlackBerry is a recommendation of Stock Advisor Canada.