Here Are Warren Buffett's Most Profitable Stock Picks

The Buffett Philosophy: A Study of Human Nature

To Warren Buffett, the realm of investment is not simply a blend of art and science. It goes beyond that, tapping into a deep understanding of human nature and a willingness to tread on what may appear as commonplace. Buffett, fondly known as the Oracle of Omaha, is a living testament to the idea that the mundane does not necessarily equate to the unprofitable. The simplicity of his investments is remarkable, with holdings in commonplace products and services - from daily necessities like razor blades and laundry detergents to consumables such as soft drinks, and even automobile insurance.

At the heart of Buffett's investment strategy lies a fundamental principle: the pursuit of long-term value. He shuns fleeting trends or rapidly evolving technologies that may be profitable in the short term but have a high chance of becoming outdated in the future. His approach to investment is anchored by his famous words: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

The Pursuit of Long-Term Value Investments

In the 1980s, Buffett candidly professed his affinity for the cigarette business, with its low production cost, high selling price, addictive nature, and impressive brand loyalty. Although his stance on the tobacco industry has since evolved, the sentiment encapsulates his vision of an ideal investment.

Berkshire Hathaway (BRK.A), Buffett's holding company, has a diverse portfolio encompassing wholly-owned subsidiaries like GEICO Auto Insurance and Benjamin Moore & Co., and substantial stakes in public corporations. The corporation's status as the largest shareholder of both Coca-Cola (KO) and Kraft Heinz (KHC) underscores its preference for brands with a ubiquitous presence.

A significant part of Buffett's genius lies in his selection of seemingly ordinary companies like See's Candy and Gillette, both of which became powerhouses of profitability under his stewardship. The strategy is straightforward yet profoundly effective:

• Find stable companies with strong brand recognition, top-notch management, and sound financials.
• Actively invest in these companies by acquiring outright ownership or a substantial interest.
• Leverage the power of compounding by sticking with the investment over years.
• Be patient, waiting for the right price to invest, or invest immediately if the company is already fairly valued.
• Stay invested and avoid sitting on the sidelines waiting for the perfect alignment of circumstances.

Case Study: See's Candies - The Model Business

• Warren Buffett is globally acclaimed as a master 'value investor.'
• His investment magic lies in identifying robust companies that possess a solid brand name, competent management, and favorable financials, and then actively committing capital to them— either purchasing them outright or acquiring a substantial number of shares, often commanding control.
• Buffett heavily capitalizes on the power of compounding; investing and staying with it for extended periods.
• Upon identifying a company that fulfills his criteria, Buffett patiently waits for a price he deems reasonable, or if it is reasonably valued, he jumps right in.
• He emphasizes the significance of remaining invested rather than idling on the sidelines, awaiting the perfect alignment of circumstances.
• See's Candies: The Quintessential Business Model

In 1972, Buffett acquired See's Candies from the See family for a sum of $25 million. Established in 1921, the company's stores, reminiscent of a quintessential American village main street, are sprinkled across the western United States and numerous airports.

The product lineup is neither ostentatious nor outdated, offering treats that defy trends and stand the test of time. Over the following decades, Buffett injected another $32 million into the business, which has since returned $1.35 billion to its owners, demonstrating the genius behind this seemingly simple confectionary retailer.

What lured Buffett into this investment? Predominantly, it was the impressive profitability backed by strikingly attractive fundamentals. Its pre-tax earnings constituted 60% of its invested capital. With cash transactions, issues related to accounts receivable were non-existent.

On the cash flow front, the swift turnover of products paired with a brisk distribution cycle kept inventories lean. Strategic decisions such as hiking prices ahead of Valentine's Day directly boosted revenue. Consequently, this venture emerged as an impeccable business model, providing Berkshire Hathaway with an internal revenue source for future acquisitions.

Gillette: A Tale of Triumph

Gillette offers another illustration of Buffett's investment strategy. In 1989, Gillette's core offerings were so deeply embedded in the market that almost every American household utilized them. Gillette's razor blades, contributing substantially to the company's profits, held a significant market share as one of America's leading brands.

However, the 1980s saw the razor industry shake up as disposable razors initially captured a notable sales share from Gillette. In 1988, Coniston Partners launched a hostile takeover attempt, which Gillette successfully defended. The following year, Gillette revolutionized the industry with the introduction of the Sensor Razor, a product that appealed to men's craving for superior, cutting-edge products, revitalizing the company's sales and profits.

That same year, Buffett secured an 11% stake in Gillette with a $600 million investment, earning Berkshire Hathaway a board seat and a healthy annual dividend of $52.5 million. Through the 1990s, the growth in Gillette's stock price garnered substantial unrealized gains for Berkshire Hathaway.

The Reward of Patience

Being a paragon of patience, Buffett didn't cash in on the immediate profits but chose to reaffirm his faith in Gillette's leadership, even as the company invested heavily in research and development and procured Duracell, another iconic American brand.

In 2005, Procter & Gamble's (PG) acquisition of Gillette valued Berkshire Hathaway's shares at more than $5 billion, making it the largest shareholder of the leading global consumer product manufacturer. Buffett assured Wall Street that not only would he retain these shares, but he would also increase his position in the company.

Despite their apparent differences, See's and Gillette share one common trait that caught Buffett's eye—both house profitable and timeless name-brand products. The business strategies they employ have proven successful over time.

The razor-razorblade business model that Gillette pioneered—giving away a larger, less frequently purchased product (the razor) to sell a smaller, more frequently purchased product (the disposable blades)—and the marketing and packaging-heavy approach of See's Candies epitomize Buffett's investment philosophy.

The Bottom Line: Emulating Buffett's Investment Strategy

Emulating Buffett's investment strategy begins with identifying "wonderful" companies offering long-term value at fair prices. Then, the critical step is to leap from the sidelines and invest.

Both See's and Gillette were profitable and well-known before Buffett's investment. His willingness to commit capital and stay invested for the long haul differentiates him from those who only observe and wait.

Buffett aptly describes his strategy as the "Rip Van Winkle approach," an homage to Washington Irving's short story character who falls asleep and awakens 20 years later. Although perfect timing is elusive, Buffett counsels "to be fearful when others are greedy and to be greedy only when others are fearful."