Warren Buffett - How to spot a good investment idea

Key takeaways at the end

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Our investments continue to be few in number and simple in concept: The truly big investment idea can usually be explained in a short paragraph. We like a business with enduring competitive advantages that is run by able and owner-oriented people. When these attributes exist, and when we can make purchases at sensible prices, it is hard to go wrong (a challenge we periodically manage to overcome).

Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn't count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analyzed an investment alternative characterized by many constantly shifting and complex variables.

We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?

1994 Shareholder Letter

* Bold emphasis added

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Key concepts and takeaways:

• Keep it simple: Focus on the big picture and on megatrends. Degree of complexity does not necessarily lead to higher reward in the long-term. Do not feel you need to generate many investment ideas per year. There might not be that many. When you find one, make sure you invest a meaningful amount.

• Focus on the company: Analyze the company and the industry it operates in. Swings in market sentiment should not impact your decision whether an investment idea is good or bad. 

• Focus on the price: Price is what you pay, value is what you get. Great companies are sometimes trading at attractive prices relative to the value they represent. What is wise at one price is dumb at another.