Those who are considered skilled in warfare achieve victory in situations where success is easily attainable : Making investments under favourable conditions that make it easy to gain profit

"Ancient wisdom states that those who are considered skilled in warfare achieve victory in situations where success is easily attainable."

(The Art of War : Attack by Stratagem)

In ancient times, those who were known for their expertise in warfare would only engage in battles under conditions that ensured an easy victory. Their strategies were built on the foundation of guaranteed success, defeating enemies that were already destined to fail.

Similarly, skilled investors make investments under conditions that are likely to yield profits. Their investment strategies are also based on a foundation of certainty, investing in opportunities that are sure to be profitable.

Purchase an Outstanding Company

Warren Buffett's investment approach is also built on a foundation of certainty. He only invests in companies that are leaders in their respective industries. He believes that selecting the right company is the first step to a successful investment; if the initial step is wrong, successful investing becomes unattainable. The companies he chooses typically possess the following characteristics that make investment success more likely:

1. Monopolistic Consumer Brands
2. Companies with "Economic Moats"

Monopolistic Consumer Brands

Buffett has a strong preference for companies with monopolistic consumer brands. He believes that such companies have stronger profit potential and better growth prospects compared to those engaged in ordinary business. Due to the quality of products and service attitude provided by the company, consumers develop trust in the company, which becomes its goodwill. Although goodwill is merely a psychological state of consumers, it is an intangible asset with immense commercial value. It can help the company monopolise a certain product's market, driving consumers to purchase only that company's products based on their trust.

Even during economic downturns, due to the trust of the consumer base in their products, these companies’ profits are less likely to be affected significantly, thus providing more stable returns to investors. Therefore, investing in such companies carries less risk and more guaranteed profits.

Buffett believes that monopolistic consumer companies do not need to heavily rely on investments in land, plants, or equipment. Their wealth mainly exists in the form of intangible assets, such as Coca-Cola’s formula, Gillette, and See’s Candies brands, which are immensely valuable. Because they have a stable customer base and influential intangible assets, these companies enjoy excellent economic goodwill, which leads to high market share and extraordinary profitability. Buffett is very optimistic about such monopolistic consumer companies, believing that these companies have broad development prospects, making investing in them a surefire choice.

Companies with "Economic Moats"

Warren Buffett’s long-term holding strategy is based on owning companies with “economic moats.” Only such companies can continually eliminate competitors over time and grow consistently. By holding these companies’ stocks and patiently waiting, investors can benefit from the power of time and enjoy the returns that come from the company's long-term success.

The "economic moat" that Buffett refers to is an unique factor that allows a company to maintain its competitive advantage in the market. An economic moat helps a company defend its market share and profitability against competitors, much like a wall protects a city.

Here are some common types of economic moats:

1. Brand Power: A strong brand earns consumer trust, allowing the company to charge more for its products or services.

2. Cost Leadership: A company can produce products or provide services at lower costs, giving it a price advantage in competition.

3. Network Effects: As the number of users or customers increases, the product or service becomes more valuable. Social media platforms and online marketplaces are examples.

4. Patents and Intellectual Property: Owning unique patents, technology, or intellectual property can restrict competitors' entry and protect market share.

5. Scale Advantage: Large companies benefit from economies of scale in production, distribution, and marketing, making it difficult for smaller competitors to enter the market.

6. Government Licences and Regulations: In some industries, government licences and regulations can create an economic moat, hindering new competitors from entering the market.

7. Customer Loyalty: Companies can build customer loyalty through excellent customer service and long-term relationships, helping to protect market share.

An economic moat is one of the key factors that investors and corporate strategists consider because it influences a company's long-term competitiveness and sustained profitability. A strong economic moat usually means a company is more likely to succeed in the market and maintain a leading position.

Buffett believes that companies with economic moats can withstand poor management or operational mistakes because their competitive advantages make them more resilient and harder to defeat by competitors. This allows these companies to survive in the market for the long term and achieve steady profits.

Buffett rarely focuses on economic conditions or stock market trends. He once said, "Even if the Federal Reserve Chairman whispered to me what the policy was going to be over the next two years, I wouldn’t change a thing I do." Buffett explained that just as no one can accurately predict economic trends, no one can predict the stock market's direction. Investors who try to predict the economy and stock market before buying stocks that align with their predictions are making a foolish move because they only profit if their guesses about the economy and stock market are correct. 

Therefore, Buffett prefers to buy stocks in companies whose profitability is not affected by economic changes. These companies can profit in different economic environments. If one holds stocks in such excellent companies, why bother tracking stock market fluctuations and economic news daily? This is Buffett’s "victory in easily attainable conditions" strategy: If you invest, invest in top-tier companies that can consistently generate profits. The risks associated with investing in such companies are far lower than those for mediocre companies. Buffett would not be tempted even if a mediocre company’s stock price dropped significantly. Throughout his life, he has sought companies with consumer monopolies or economic moats, that is, companies where investment success is easily achievable.

Buying Stocks at a Reasonable Price

Warren Buffett reminds investors: "The price you pay determines your investment return, and investors should always keep this key point in mind." To illustrate the relationship between purchase price and return, consider this hypothetical scenario: Suppose you buy a share of stock for $1,000 at the beginning of the year, and by the end of the year, you receive a $100 dividend. Your investment return rate is 10%. However, if you had bought that share for $2,000, with the same $100 dividend, your return rate would drop to 5%. If the bank's interest rate that year was 8%, then purchasing that stock for $2,000 would clearly be unreasonable, as you could have earned an additional 3% interest by simply putting the $2,000 in the bank.

As Buffett said: "You should first decide on the business you want to buy, and then buy it when it is available at a price that allows you to profit." Therefore, even if you purchase an outstanding company, doing so at an unreasonable price does not constitute a wise investment. A wise investment involves not only selecting a quality company but also buying it at a reasonable price, ensuring that the investment is an easily attainable victory. Thus, investors need to understand how to evaluate a company's value and how to think rationally about market prices. This knowledge is crucial for making informed investment decisions. "Investment students need only two well-taught courses: How to Value a Business and How to Think About Market Prices." – Warren Buffett

The concept of the margin of safety is one that Buffett emphasises in his investment strategy. It is a key element of his successful value investing approach. The margin of safety refers to the difference between the purchase price of a company's stock and its intrinsic value. Here’s how to calculate the margin of safety:

1. Estimate Intrinsic Value: First, investors need to estimate a company's intrinsic value. This can be achieved by analysing the company’s financial statements, cash flows, future earning potential, etc. Different valuation methods can be used, such as Price-to-Earnings (P/E), Price-to-Book (P/B), and discounted cash flow, to estimate intrinsic value.

2. Determine Purchase Price: Determine the price you are willing to pay, which is typically the current market price.

3. Calculate Margin of Safety: The formula to calculate the margin of safety is as follows:

Margin of Safety = (Intrinsic Value - Purchase Price) / Intrinsic Value

The margin of safety is usually expressed as a percentage. A positive margin of safety indicates that the purchase price is below intrinsic value, making it a potentially favourable investment. A negative margin of safety suggests that the purchase price is above intrinsic value, which may not be a wise investment choice.

Estimating a company's value is not an exact science, and to account for possible estimation errors, a sufficient margin of safety provides a buffer against price declines, ensuring the safety of the investment. For example, if you estimate a company's value to be $10 per share and purchase it at $8 per share, you have a 20% margin of safety. Even if the company's actual value turns out to be $9 per share, you still profit by $1 per share.

Buffett places great importance on a company's intrinsic value. He believes that due to the market's irrational behaviour, certain stocks may sometimes be undervalued or overvalued, but the stock's fair value will eventually be reflected in the market. Therefore, buying stocks of companies whose intrinsic value is undervalued by the market creates a safe profit margin for investors. "If a business does well, the stock eventually follows." – Warren Buffett