At the beginning of his career, Warren Buffett was a value investor. At some point, he realized value investing cannot scale after certain capital size is reached. Then, he started to buy great businesses at a reasonable price.
I like businesses I can understand. It is not an easy business for competitors to enter. I look for a competitive advantage – cost, brand; share of mind is priceless and better than market share. How much could anyone hurt them if they had a billion or 10 billion dollars. If they can’t make a dent, I am in.
I want to know what a business will look like 10 years from now. If I can’t see them where they will be 10 years from now, I don’t buy them. We are buying a piece of a business. You will do well if the business does well if you didn’t pay too high of a price.
The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.
Jeff Bezos manages Amazon the way Buffett invests nowadays. He asks the question what is not likely to change ten years from now and builds his operations on those principles.
I very frequently get the question: ‘What’s going to change in the next 10 years?’ And that is a very interesting question; it’s a very common one. I almost never get the question: ‘What’s not going to change in the next 10 years?’ And I submit to you that that second question is actually the more important of the two — because you can build a business strategy around the things that are stable in time. … [I]n our retail business, we know that customers want low prices, and I know that’s going to be true 10 years from now. They want fast delivery; they want vast selection. It’s impossible to imagine a future 10 years from now where a customer comes up and says, ‘Jeff I love Amazon; I just wish the prices were a little higher,’ [or] ‘I love Amazon; I just wish you’d deliver a little more slowly.’ Impossible. And so the effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying off dividends for our customers 10 years from now. When you have something that you know is true, even over the long term, you can afford to put a lot of energy into it.
Both Buffett and Bezos look for long-term sustainable competitive advantages that are very likely to pass the test of time.
Is your trading system developed on principles that are not likely to change ten years from now?
Is your approach based on an understanding that the market is constantly changing and different markets need to be approached with different setups? This requires having a portfolio of different setups and knowing when to use them.
Do you have methods that will find big future winners on a regular basis? The names of future winners will be different than the ones today, but they will have something in common.
Do you have a clearly defined plan to Take advantage of the inevitable market corrections, sector rotations, institutions’ buy and sell decisions, price trends, momentum, volume and price range expansions?
Do you realize that correlations and volatility spike during market corrections and no amount of plain vanilla asset diversification will save your portfolio from a deep drawdown? Are you prepared to stomach 20%, 30%, 50% drawdowns or do you have a way to make them a lot smaller?