3 Shares with Investing Traits Which Are Cherished By Warren Buffett

Warren Buffett took over the reins of the conglomerate Berkshire Hathaway exactly 50 years ago in 1965 back when it was a struggling textile manufacturer.

Since then, Buffett has built up a truly phenomenal track record of investing success by helping Berkshire to compound its book value at an astonishing annual rate of 19.4% over those five decades.

Buffett’s cherished investing traits

Given such credentials, Buffett’s thoughts on investing would be well worth heeding. On that note, in his 2014 Berkshire annual shareholder’s letter, he had shared six criteria which he uses to evaluate private businesses for acquisitions.

As shares essentially represent partial ownership of a business, what makes for a good private business would also make for a good long-term investment in the stock market as well. With that, here’re two of the six criteria which are particularly applicable for stock market investors:

“(2) Demonstrated consistent earning power (future projections are of no interest to use, nor are “turnaround” situations),

(3) Businesses earning good returns on equity while employing little or no debt,”

Said another way, what Buffett’s looking for with these two criteria are businesses that have earned consistent and growing profits as well as the ability to generate high returns on shareholders’ capital without resorting to undue leverage.

In particular, a firm that has consistently earned a high return on equity without having to borrow much is a sign that it might have businesses which possess lucrative economic characteristics – when held over the long-term, such a company can make for a wonderful investment for its owners.

The local superstars

So, what are some of the local shares in Singapore which have such traits? The trio of Kingsmen Creatives Ltd (SGX: 5MZ), Raffles Medical Group Ltd (SGX: R01) and Super Group Ltd (SGX: S10) might just fit the bill.

Earnings growth for Kingsmen, Raffles Medical, and Super since 2004

Source: S&P Capital IQ

Over the decade from 2004 to 2014, the three shares can be said to have generated consistent growth in their per-share earnings despite the occasional fluctuations. You can see this in the chart above.

Return on equity for Kingsmen, Raffles Medical, and Super since 2004

Balance sheet figures for Kingsmen, Raffles Medical, and Super since 2004

Source: S&P Capital IQ

As for their track record with the return on equity metric, the two charts immediately above will point to how they’ve generated great returns on equity – of mostly 15% or more over the 10 year block of time under study – while generally having rock-solid balance sheets that are flush with cash and have minimal or zero borrowings.

A Fool’s take

It’s perhaps no surprise to find that Kingsmen Creatives, Raffles Medical, and Super have been long-term stock market superstars. Since the start of 2004, they have generated capital gains of 450%, 981%, and 610% respectively.

In comparison, Singapore’s market benchmark, the Straits Times Index (SGX: ^STI), had grown by only 91% in price over the same period.

None of the above is meant to suggest that Kingsmen Creatives, Raffles Medical, and Super would necessarily make for good investments going forward. Investors would still have to consider their valuations in relation to their future business prospects in order to come up with an intelligent investing decision.

But, with the great long-term track record that the trio have displayed with regard to the important investing metrics which Buffett cherishes, they’d at least be worthwhile candidates for further study.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway, Kingsmen Creatives, Raffles Medical Group, and Super Group.