How Warren Buffett got rich


It didn’t take much for world sharemarkets to tumble.

A little bit of soft US jobs data and renewed European worries saw the ASX suffer its largest sell-off for the year on Monday.

Panic is in the air.

On another day, things might have been so much better for local investors.

Retail sales rose almost 5 times more than expected in March, up 0.9% versus forecasts of just 0.2% as, according to the AFR, consumers spent more in cafes and restaurants.

Cafes and restaurants, hey? How life has changed.

Where as once we were spending on flat screen TVs and home entertainment systems, now we want to get out of our over-valued houses and sip coffee and munch on gourmet bagels.

Down, down, prices are down — but this one’s attractive

A rational investor might have thought retail stocks should have been bid up yesterday. But no. As usual, our markets slavishly followed the lead of the US and Europe, so down, down we went.

We’ve got a close eye on a couple of ‘cafe and restaurant’ stocks.

Dean Morel covered one in yesterday’s regular weekly email alert sent to Motley Fool Share Advisor subscribers, saying he finds the current price attractive, as the company appears to be struggling from cyclical problems rather than the structural problems facing retailers such as Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH).

Another company on our radar is Retail Food Group (ASX: RFG). The company is behind some well-known food brands including Donut King, Michel’s Patisserie, Brumby’s Bakeries, bb’s cafe, Esquires, Big Dad’s Pies and Pizza Capers.

While Dean likes its brands, he doesn’t like its share price. But he’s happy to wait for a better entry point — something a nervous market may give us in the coming weeks and months.

How Buffett got rich

As you can imagine, a falling market doesn’t worry us in the least. On the contrary, a panicked market often presents calm, measured, reasoned investors with very attractive investment opportunities.

As Warren Buffett said just this weekend at Berkshire Hathaway’s AGM…

“The beauty of stocks is they do sell at silly prices sometimes. That’s how Charlie and I got rich.”

The anatomy of our ideal investment opportunity

Here at The Motley Fool, we invest in companies. Our ideal company is one with a strong and sustainable competitive advantage, and one which is able to take advantage of structural tailwinds.

A company like ResMed (ASX: RMD), the global leaders in sleep and respiratory medicine, fits the bill almost perfectly.

The size of their addressable market is large, and growing. There is 20% sleep apnea in the adult population — 13% mild; 7% moderate to severe.

Sleep apnea is prevalent in patients with other serious conditions, including hypertension, obesity, cardiovascular disease and type 2 diabetes — all growing problems in ageing populations.

ResMed has just recorded its 69th consecutive quarter of revenue growth, with earnings per share up a very impressive 29% in its most recent quarter.

No wonder then that ResMed trades at a premium valuation — a price to earnings ratio of around 22.

It’s little wonder then…

Naturally, a company of the quality of ResMed is firmly on Dean Morel’s radar.

Dean is not afraid to pay up for a quality growth company — he effectively did so when selecting his top ASX biotechnology company in the most recent issue of our ‘best of the bestMotley Fool Share Advisor stock recommendation service.

The market often undervalues companies that can consistently grow their profits by 20% per annum — as ResMed has done over the past 5 years.

Dean thinks the ResMed share price has run a little too hard recently, up more than 30% so far in 2012.

He’d like nothing more than for ResMed shares to be irrationally sold off in a good old-fashioned market crash. And unlike many investors, he’s happy to wait for the market to come to him, rather than chase a stock higher and higher.

How to lose money — quickly

We’ve been accused of going somewhat overboard in writing about the ASX’s hottest stock of 2012, Maverick Drilling & Exploration (ASX: MAD).

Yesterday, Maverick plunged over 16% to $1.11. There was no news about the company. The underlying story remains the same — long on potential, short on profits, especially when compared to its $500m market capitalisation.

So why the big move yesterday?

Panic. Greed. Fear. Stop-losses. Margin.

Hot stocks like Maverick trade on emotions. Investors are clearly chasing the stock price, not the company.

It’s a recipe for failure, and one you won’t see in The Motley Fool cookbook.

If you’re looking in the market for some high yielding ASX shares, look no further than “Secure Your Future with 3 Rock-Solid Dividend Stocks”. In this free report, we’ve put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. Bruce Jackson owns shares in Maverick Drilling & Exploration. This article contains general investment advice only (under AFSL 400691).

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