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Thursday, November 3, 2016
Keeping it simple.
That's how investing legend Warren Buffett became one of the world's richest men.
Buffett built his fortune by buying businesses that are easy to understand.
Today, his stock portfolio contains some of the best businesses in the world... Meanwhile, he famously avoided Internet stocks during the 1990s dot-com bubble because he didn't understand them.
As an investor, you might be afraid of missing out or eager to jump on the latest fad stock. But keeping it simple is how Buffett made his fortune. Today, we'll show you how Buffett made money by investing in the world's best companies... and how you can do the same...
The companies Buffett buys have iconic brands... sell their products around the globe... and dominate their industries. They've been around for decades... and won't be going away anytime soon.
They have high operating margins and strong balance sheets... generate massive returns for shareholders... continue to grow... and likely won't change much in the coming years.
They're safe... and simple.
These basic principles form the foundation of Buffett's investing philosophy. After all, he once said, "I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will."
Take Coca-Cola (KO), for example...
Forbes magazine ranks Coca-Cola as the fourth-most-valuable brand on the planet... behind Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT).
Coca-Cola started selling soft drinks in 1886. It still sells soft drinks today. And if we were betting men, we'd wager that it will still be selling soft drinks a century from now.
But the company lost its way in the late 1970s when then-CEO J. Paul Austin decided to put millions of dollars into a stack of unrelated businesses... including shrimp farming and winemaking.
The board ultimately got rid of Austin and appointed Roberto Goizueta in the early 1980s to turn things around and focus on Coca-Cola's core business – selling soft drinks.
Under Goizueta's watch, the business got back on its feet during the 1980s... And Buffett began buying shares. In 1988, he used more than $1.3 billion – roughly half of his stock portfolio – to buy 8% of Coca-Cola's outstanding shares.
Today, he owns 400 million shares – a little more than 9% of the stock. His stake is now worth almost $17 billion. He earned more than $500 million in dividends from Coca-Cola alone last year. That's almost half of what he spent to buy the stock initially.
We hope you're starting to get the point...
As we said earlier... Buffett's philosophy is easy to understand. And it has rewarded him handsomely. He's worth roughly $65 billion today – which means he's the fourth-richest person in the world, according to Forbes.
But few investors have the patience to buy these great businesses like Buffett has done over the past 50-plus years. They're often too boring. Most investors just want the next "hot stock" pick that pundits say could double or triple overnight.
Buffett doesn't do that. And neither should you.
We want great companies that have a prominent brand or some other quality that allows them to dominate their respective sectors. These companies have healthy margins and strong balance sheets, and they look after their shareholders. We call these companies the "Global Elite."
As we've said time and time again... the secret is buying these businesses when they're selling for cheap.
It takes patience, but buying great businesses at reasonable values is the key to Buffett's time-tested investing strategy. So remember... Keep it simple.
Steve personally uses another one of Warren Buffett's investment strategies with his own money. Get the details here: Exactly What I Do With My Own Money.
DailyWealth classic: Another one of Buffett's favorite investment strategies involves buying companies that are "capital efficient." Learn more about this idea here: The Gift of Capital Efficiency.
THE MOST IMPORTANT PRICE ACTION NOBODY IS TALKING ABOUT
The financial sector is on fire...
Regular DailyWealth readers know we monitor America's big banks, like JPMorgan (JPM), Bank of America (BAC), and Citigroup (C). These firms are the country's "financial backbone." They rise and fall with America's ability to make money, save money, service debts, and generally "just get along."
Like most stocks, the big banks suffered a crash in 2008 and 2009. Since then, they have been slowly recovering. But with global interest rates on the rise, banks are rallying...
The chart below shows this market at work. It displays the price action of megabank JPMorgan. You can see that JPM shares are enjoying a series of "higher highs and higher lows." They're up nearly 30% from their February lows and are trading at a new 52-week high. With an interest-rate hike expected in December, keep an eye on big banks like JPMorgan...