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3 Warren Buffett Quotes That Tell You What A Great Investment Looks Like

Credit: Fool Editorial Photos

Warren Buffett’s one of – if not the – best investors the world has seen. What better way to learn about investing than from his words then? Here are three Buffett quotes on what a great investment looks like, bearing in mind that that it’s a great business which makes for a solid long-term investment.

1. “The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage.”

In the first quote here, Buffett provides a negative example – and it’s no less useful for our purposes. Great businesses will look like the opposite of what the textile industry is like.

In other words, great businesses may be found in ones that produce differentiated goods (think products that carry a strong brand name), are not capital intensive (meaning it can produce lots of free cash flow), and can earn adequate returns on the capital that’s plowed into the business.

Are there such examples in Singapore’s stock market?

Healthcare provider Raffles Medical Group Ltd (SGX: R01) may be one. In 2013, the company’s flagship Raffles Hospital had won first place in the Customer Satisfaction ratings in the healthcare sector in the Customer Satisfaction Index of Singapore survey carried out by the Institute of Service Excellence.

Over the decade from 2004 to 2014, Raffles Medical has also grown its free cash flow from S$14 million to S$76 million and generated a healthy average return on equity of 17.1% according to S&&P Capital IQ.

2.  “We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) priced very attractively.”

Buffett highlights the importance here of investing only in things we can understand. Everyone’s circle of competence is different – so a business that makes sense to others may not make sense to you. That’s fine.

But at the end of the day, you should be able to explain your investing thesis as simply as possible. In the words of Peter Lynch, who’s another legendary figure in the world of investing, “Never invest in any idea you can’t illustrate with a crayon.”

3.  “Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago.”

The post-World War II period saw mankind achieve stunning technological progress.

The Americans managed to put a man on the moon; we’ve created clean energy by splitting atoms (nuclear fission); we’ve eradicated and kept in check many diseases; and we’ve managed to put a television, a telephone, a calculator, a GPS system – and even an entire computer – into a smallish, flat rectangular device that can fit into the pockets of your pants (hello smartphone!).

Yet, as my colleague Morgan Housel wrote in 2012, “The single best stock to own from the 1950s to the early 2000s had nothing to do with computers, or technology in even the loosest sense.” It was a company that was churning out the same product for over five decades – the cigarette maker, Altria.

The experience of Altria encapsulates the brilliance of Buffett’s third quote here and shows us just how valuable a lack of change can be.

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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 Raffles Medical Group.