I have invested in stock market for a while now. I have bought penny stocks, bank stocks, energy stocks….you name it. I had made and lost money in the process. Ultimately, buying stock and holding them long-term is the way to go because you would lose money on trade commissions in the long run.
But how do I know whether this stock I am interested is good to buy and hold? The answer is:
Recently, I have read this book written by his daughter Mary Buffett on his search for the company with durable competitive advantage.
This book outlined Warren Buffett strategies on how he picked companies like Coca-Cola, Costco and Johnson and Johnson to be part of his portfolio by simply analyzing financial statements.
The following are what Warren Buffett focuses on from interpreting an income statement:
- Companies that have 40% of gross profit margin or more consistently tend to have more durable competitive advantage
- Positive when 30% or lower of the company’s gross profit on selling, general and administrative costs
- Negative when companies invest a lot of money on research and development
- Companies with durable competitive advantage all have interest payments of less than 15% of operating income
- Comapnies that have a durable competitive advantage tend to have lower depreciation costs as a percentage of gross profit
- A company that is showing a net earnings history or more than 20% on total revenue has a real chance that it has some king of long-term competitve advantage
- Companies that are showing increase in per-share earning every year tend to have long-term competitive advantage
In the next post, I will mentioned what I learned from interpreting balance sheet and cash flow statement.
Moreover, DON’T WORRY if you do not understand any of the accounting terms above. I will do some analysis on the companies I am interested in investing.
Lastly, I want to thank you the people who are following and reading my blog. That means I know everyone love what I am doing!
Please feel free to leave a comment below. Catch you on the flip side!