Education

How To Choose Which Stocks to Buy and Hold Long-Term (Part 1)?

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:

“Warren Buffett!”

Recently, I have read this book written by his daughter Mary Buffett on his search for the company with durable competitive advantage.

warren buffett

Picture from: https://www.amazon.com/Warren-Buffett-Interpretation-Financial-Statements/dp/1416573186

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!

24 thoughts on “How To Choose Which Stocks to Buy and Hold Long-Term (Part 1)?”

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