3 Things Warren Buffett Looks for in a Stock

WFC Return on Assets (TTM) Chart

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Part of the smart risk management is that Wells Fargo has historically avoided some of the riskier sides of the banking business, such as investment banking. In fact, Wells Fargo's business model is closer to that of a small savings and loan than it is to most other big banks. Plus, Wells Fargo has a history of using tougher lending standards than peers.

It was prudent risk management that not only allowed Wells Fargo to survive the financial crisis, but to come out of it even stronger than it went in by acquiring rival Wachovia at a fire-sale price.

Smart risk management is an important component of every long-term investment. This means management that doesn't take on lots of debt, doesn't make risky investments, and doesn't prioritize profits over stability.

A wide economic moat

One of Buffett's main criteria he looks for when evaluating a stock or business is a wide economic moat. This refers to a sustainable competitive advantage that gives the company a leg up on peers and will preserve its market share and profitability for years to come.

Longtime Buffett stock Coca-Cola is a great example of this. The company's brand name is one of the most recognized in the world, which gives the company pricing power over rivals. In fact, according to Millward Brown, Kantar, and Bloomberg, Coca Cola's brand alone is worth nearly $84 billion.

In addition, Coca Cola has one of the most impressive distribution networks in the world, which gives the company cost advantages and an edge when bringing new products to market. Consumer tastes may change over time, and they are right now -- in fact, sales of the company's Coca-Cola and Diet Coke sodas have been declining for some time now. However, this distribution advantage will help the company adapt better than rivals.

A "forever" business

One of Buffett's top stock holdings is Kraft Heinz , acquired when Berkshire-owned H.J. Heinz merged with Kraft Foods in 2015. And, a big reason Buffett loves this company so much is that it's a "forever" business.

First of all, Kraft Heinz has a huge economic moat in the form of its brands. Aside from the obvious (Heinz condiments and Kraft-branded products) Kraft Heinz's portfolio contains brands such as:

  • Oscar Mayer
  • Velveeta
  • Capri Sun
  • Kool-Aid
  • Philadelphia cream cheese
  • Planters
  • Lunchables
  • Grey Poupon

Not only do these provide the company with pricing power and global recognition, but these brands are what will ensure the company's success year after year. "These are brands I liked 30-plus years ago, and I like them today. And I think I'll like them 30 years from now," Buffett said in a CNBC interview shortly before the merger.

The lesson here is that Buffett loves companies with durable advantages (like strong brands) in a business that will be around forever. People will always need groceries, just like they will always need the other businesses in Berkshire's portfolio -- banking, insurance, energy, pharmaceuticals, etc.

Just a starting point

Now, this isn't an exhaustive list of the reasons Buffett bought these stocks for Berkshire's portfolio. Clearly, there's a lot more that goes into a billion-dollar stock purchase than looking at three characteristics. However, I mention these three things because they're common factors you'll find in any stocks that make solid long-term investments.

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The article 3 Things Warren Buffett Looks for in a Stock originally appeared on Fool.com.

Matthew Frankel owns shares of Berkshire Hathaway. The Motley Fool owns shares of and recommends Berkshire Hathaway and Wells Fargo. The Motley Fool has the following options: short May 2016 $52 puts on Wells Fargo. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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