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How to Pick Winning Stocks: 4 Quick Tips by Warren Buffett

Credit: Fool Editorial Photos

Warren Buffett is considered by many as the best investor of our generation.

He has an investing track record with Berkshire Hathaway which stretches over 50 years from 1965 till today. Throughout each of those years, he has written an annual letter to his shareholders. Within these letters are nuggets of wisdom, which includes useful advice for investors.

In his 1977 letter, Buffett outlined four simple criteria for companies that he would buy:

“We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.”

First off, the company has to be a business that he can understand. For instance, Buffett invests in consumer product companies such as Coca Cola and Kraft Heinz. These are businesses that are easier to understand compared to, say, the latest biotech discovery.

The second criteria relates to long-term prospects of a company. Buffett prefers to own companies that will likely be around decades from now. Think chewing gum.

The next criteria is a little more subjective. Buffett would like the company to be run by people who are both honest and competent. As investors, we do not want to spend sleepless nights because we cannot trust the people who are running the companies that we own.

The final criteria can be considered more personal. Buffett would like to be able to purchase the company with the three attributes at an attractive price. He would be unfazed by stock price falls as it presents a better buying opportunity for him.

Foolish takeaway

Those are four separate criteria, but for me, the rules support each other.

Buffett buys to hold for the long-term. And, if we intend to hold a stock for the long-term, then we should have a good understanding of what the business does. We should also have confidence in the people leading the company. Buffett will then attempt to find a good price to pay for the company that meets all the previous criteria.

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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 contributor Chin Hui Leong own shares in Berkshire Hathaway.