Super Simple Investing Method That Made Buffett Rich

A lot is made of Buffett’s approach to investing but it can be simplified to a level even a 12-year old understands.

While it’s easy for sophisticated investors to get caught up in the weeds of price-to-earnings multiples, competitive advantages, book values, and balance sheets, there is arguably a much simpler approach Buffett has taken to investing that can be applied by just about any investor willing to spend a little time musing on the topic.

At an early age Buffett pondered how much money he could make if he were able to capture just a small amount of money from each car passing on the road. Over time, governments figured out the answer with toll roads. But Buffett extrapolated the idea to other industries.

For example, long before the COVID crash, we surmise that he asked the question, how do I capture a portion of the economics from each person traveling by plane? And the answer might surprise you, because it wasn’t simply to find a good airline stock.

Key Points

• Invest in dominant companies that capture a portion of industry profits, like Apple or Coca-Cola.
• If no clear leader exists, buy shares in the top few industry players to ensure coverage.
• Focus on established, cash-generating companies rather than speculating on future growth.

Buffett’s Big Idea

Buffett’s big idea wasn’t to figure out whether American Airlines was better than Delta, or if both were better than JetBlue. Instead, he concluded that if he owned a share of the largest four airlines, he would largely capture a portion of the economics of the whole industry.

It’s not particularly different when he decides to buy Apple or Coca Cola or American Express. The same principle can be applied in those cases.

For example, if you had no phone and had to buy one, which would you buy. It wasn’t even 20 years ago you had a myriad of choices from Blackberry to Nokia to Ericsson.

These days, you are largely restricted to two operating systems, because most apps are built on them: Android and iOS.

While Android serves a greater volume of phones, iOS and Apple own the lion’s share of the revenues. And for Buffett that means to capture a portion of those economics, the best bet is Apple.

So too, in the beverage industry, Coca Cola is akin to the toll road that most consumers must drive through to pick up their favorite soda. While PepsiCo is a serious rival, it focuses heavily on snacks. Coke is more of a pure play on the beverage industry and still has the leading share.

So what should you do?

What Stock Should You Buy?

When you’re looking for the next stock to buy and hold for the long-term, consider whether it acts as a toll road for its industry. If it’s like Coca Cola or Apple, the stock alone can be purchased and reward you.

If no clear leader exists, the airline approach Buffett employed works well too, meaning buy the top 2 or 3 or 4 players in the industry and if one loses market share, another will likely pick up market share.

By so doing, you too can realize the aspirations Buffett had early on to earn a nickel from each car passing by, so to speak. Whether that’s a share of each beverage consumed, each phone bought, or each plane boarded.

The approach of buying what is already dominant tends to fare much better than the strategy of buying what will one day perhaps take the lead.

Buying into potential growth that hasn’t yet materialized has proven very costly for some money managers in recent years, like those at ARK Invest, whereas sticking with what’s tried and tested, buying leaders who produce massive cash flows is a time-tested approach that put the odds in your favor.