I think these Warren Buffett tips can help you identify great businesses

Warren Buffett is widely considered to be one of the greatest investors of all time. During his eight-decades-long investing career, the investor and businessman has built a considerable fortune in the stock market. 

And there’s a tremendous amount we can learn from him. His investing tips can help anyone identify great businesses to buy and hold for the long term. 

Warren Buffett’s tips 

“Never invest in a business you cannot understand.” 

This is one of the billionaire’s best pieces of advice and it’s advice he follows himself. For a long time, he avoided technology companies. He’s changed his opinion on the sector recently, but he always said he wanted to avoid tech stocks because he didn’t understand the industry. Therefore, he didn’t know if he was buying a good business or a failing enterprise. 

He has had the same opinion about pharmaceutical companies.

This could be a good tip for investors to follow. Buying something you don’t understand can be a fast way to lose money. If you don’t know what you are buying, you can’t be sure you’ll get a good return. That’s the method that’s helped Warren Buffett avoid big losses over the years. 

As such, by sticking to the businesses you understand, you too may be able to avoid taking significant losses.

If you want to invest in a sector like tech, but don’t know where to start, buying an investment fund managed by experts could be a better option. 

Stay away from start-ups

“We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We’re not smart enough to do that, and we know it.”

Warren Buffett also stays away from start-ups. He knows that trying to find winners in booming sectors is very difficult, and there’s no guarantee of success. The investor has no edge in this market, and he knows it. So he’ll stay away.

Instead, he prefers established, high-quality, highly profitable businesses. It may be best for other investors to follow suit.

Quality is key

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

The investing legend has built a fortune buying quality. This last point is vital for patient investors. 

Historically, high-quality companies with a definite competitive advantage have provided the best returns over the long term. These competitive advantages can be anything from a world-leading brand (Coca-Cola) to the profit margin benefits that come with size (Bunzl).

Having an advantage makes it harder for peers to take market share from a business. It’s also easier for the company with a competitive advantage to grow and produce large profits for investors. 

These high-quality businesses are usually more expensive to buy than cheaper stocks. However, as Warren Buffett says above, it’s better to buy an excellent company at a fair price.