Warren Buffett: How to Find Great Stocks for 2023

Okay, so you've seen that the market is down at the moment. You know you should be investing right now, but how on Earth do you actually find great stocks to invest in? Well, in this video, we're going to talk about a surprisingly simple screening method inspired by value investors such as Warren Buffett, Peter Lynch, Charlie Munger, and Monish Pabrai that reliably finds you winners amongst the thousands of publicly traded businesses out there.

So, no time to waste! There's six steps to this process, and with that, let's dive in with step number one. Now, a lot of people think that the first step to finding a great business is to simply find what stocks are the cheapest. You know, what has the lowest PE ratio? What does the stock screener spit out at you as the cheapest result? That is definitely wrong.

Let me tell you, firstly, looking at the price is a very dangerous habit to start forming if you want to do well in the long run. The real first step in this screening process is, in fact, to define your circle of competence. So how do you do that? Well, make a list of all the things you're really good at, all the things you spend time on, and all the things you spend money on. Then, get out the Venn diagram. The topics that appear in multiple sections are probably in your circle of competence.

For example, while I'm not great at video games, I do spend a fair chunk of my time playing them, and I certainly spend way too much money on them. So video game companies are probably going to be much closer to my circle of competence than, say, pharmaceutical companies. Look for those common themes in your Venn diagram, and then from there, you can literally Google search like "video game stocks", and there you go! There's the list: Activision Blizzard, Take-Two Interactive, Electronic Arts, Nintendo, Microsoft.

Now, that's not a shopping list, to be clear, but that's your starting point. Because chances are, if you spend money on it, if you spend your time on it, and if you're naturally good at it, then you'll already have a good idea of how businesses in that field operate, and you haven't even read an annual report yet.

Have a listen to this: If you don't know enough to know about the business instantly, you won't know enough in a month or two months. I mean, you have to have sort of the background of understanding and knowing what you do understand and don't understand, and that is the key. It's defining what I call your circle of competence, and everybody's got a different circle of competence. The important thing is not how big the circle is; the important thing is staying inside the circle. And if that circle has only got 30 companies in it out of thousands on the big board, as long as you know which 30 they are, you're okay.

You should know those businesses well enough so that you don't need to read do lots of work. So step one: define your circle of competence. Don't just try and find a stock that's super cheap and then try and work backwards to understand it. Trust me, I've done that; it just simply doesn't work.

So that's step number one. But what do you do after you've found a selection of companies that you feel as though you could understand well? For the next step, we're going to look at a recent interview from Warren Buffett's disciple, Monish. So let's listen to Monish explain this next step, and then I'll show you how to do what he says in the clip.

So usually, my most preferred starting point on a company is to see, you know, as you know, I'm the shameless cloner. So the first thing I'm trying to ideally do is, hopefully, someone smarter than me already owns the stock, and hopefully, they have made some comments about it. So the first thing I try to look for is, who are the shareholders? Usually, I don't need to look at the shareholder because usually it is coming through some guy or some fund that I admire, and they have this particular company as a holding.

So luckily for us, there's no anti-plagiarism rules in investing. So the next step is to take your list of companies and have a look if any of the super investors own them—the Buffets, the Mungers, the Lealuzes of the world. A great website to use for this step is Ticker.com, who are also the sponsor of today's video.

So there are two ways to go about this step. You can either look at the super investors' portfolios and see what's in there, or you can look at the company you're interested in and then see if any super investors are on the list of major shareholders. Personally, I would start simply by browsing super investors' portfolios. For example, on Ticker, you can click on "Track Investing Gurus," and immediately we can see a whole bunch of different funds from all the super investors. You know, if you click on Berkshire Hathaway, bang! You can see Warren Buffett's largest holding is Apple. They also like Bank of America; they like Coca-Cola.

Alright, we can check out Pershing Square, which is run by Bill Ackman. He owns Chipotle; maybe that was on your list. I know I certainly spent a lot of time and a lot of money in Chipotle when I was over in the states earlier this year. But we can also see Bell Post Group run by Seth Klarman. We can see Scion Asset Management by Michael Burry. The list goes on; you can literally just browse all of these super investors' portfolios, and then if you find that one of the investors holds your stock, just research their rationale for buying in. You know, Warren Buffett has spoken many times in the past on Apple and Coca-Cola. A quick Google search will tell you literally everything about his thesis.

So that's the first method. Alternatively, you can simply search the company of interest, say Apple, and then you can just look at the ownership tab. Now, yes, there's going to be a flood of ETF providers and investment banks on the list, but occasionally you can find super investors as well. Berkshire Hathaway is second on the list there. If you type in Tesla, you'll find Larry Ellison. Type in Japan Hotline, you'll find Pershing Square.

So, step number two is to use Ticker to your advantage and check whether your companies have been bought by the world's best investors. Then just Google what they've said about the company in the past to begin to get an understanding of what the value investing thesis actually is. I just wanted to take this opportunity as well to thank Ticker.com for being fantastic supporters of the channel. By the way, a lot of this stuff is free on their platform, so I definitely recommend you check it out.

And if you do decide you'd prefer some of the more premium features, like access to over a hundred thousand stocks globally, or ten thousand funds' holdings, ten years' worth of financial charts, three years of Wall Street analyst estimates, or three years of earnings call transcripts on stocks globally, then you can use my referral link down in the description and get 25% off an annual subscription.

But anyway, that's step number two. From there, step number three is to go and skim through the most recent annual report. Now, at this stage, you don't need to read the whole thing because some annual reports can be very long and very intimidating, but at the start of every single annual report, also known as the 10-K, the management will perfectly describe what the business is, what they do, and how they make money. You know, if you take five minutes and just read that section, you'll very quickly get a sense of whether this is something you're interested in or whether this business goes on the "too hard" pile.

And again, Ticker comes in clutch here. Simply type in your company's name—Meta, for example—then you can go down to "Filings," narrow it down to the 10-Ks, and there you go! If we go to Meta's most recent annual report, we can very quickly get a sense of what they're all about. You know, the first section tells us that Meta is a family of four apps, that they generate all of their revenue from selling ads. They have their Reality Labs business, which is a collection of virtual and augmented reality projects, but that's still a very small part of their business. It really is that simple. That's all you need to do in this screening stage: just get a sense of how the business works and whether you want to learn more about it.

So that's my step number three: skim the first part of the annual report. But now, let's go back to Monish to talk about what comes next. Usually, if the company is giving us letters to shareholders, and it appears that those letters to shareholders are not written by a PR firm, then I'll have my assistant just make a PDF of all the 20 years of letters—20, 30 years of letters—starting with the oldest one, and then I just read the letters. You know, because then I can say, "Okay, what were they saying in '95?" and then what happened by 2000? "What was the thing in 2000?" What happened by 2005? I can just see kind of what they were saying versus how the trajectory of the business has gone subsequently.

So, step four is to read the annual shareholder letters over time. Why? Well, because it shows you a lot about the management's execution and it tells you how they treat their shareholders. You can tell a lot about a CEO from the contents of the shareholder letter. So go back a few years, read what they were promising, and then cross-check that with how well they actually did.

You know, do they under-promise and over-deliver? Are they honest? Do they talk about the challenges as well as the successes, or are they always trying to sell you this company? Are they just trying to convince you how good the company is? The other interesting thing about reading these letters, especially reading them in the past—for example, we know that in '08 and '09, a tsunami is coming. We know that, so when I'm reading the 2005 letter or 2006 letter or 2007 letter, they don't know that, right? But I know that. So it's like you're about to go off the cliff down the waterfall, but you don't know that. Then they're in the waterfall, and then they're finally at the bottom. You know, you can see that whole thing play out in the letter. So that kind of gives you a view of how the company deals with, you know, how resilient the business model is in the face of adversity.

Same thing with the pandemic, right? You know, and again, this step is as easy as a Google search: "Netflix letter to shareholders," "Amazon shareholder letters," or "Berkshire Hathaway."

Now, it's worth noting that not all companies will do this, which is a bit of a bummer, but you know a lot of the good companies still do. However, if they don't, well, don't fear, because there is actually a backup plan, which is our fifth step. Have a listen: If I am still interested in the business after reading the letters, then I go to the transcripts. It's actually definitely not written by a PR firm, right? Because this is actually investors and analysts asking questions and so on and so forth.

So, I'm not that interested in the prepared remarks in the transcript because that will be similar to what's in the reports and the annual reports because they're controlling that messaging. But especially the companies that don't write their own letters, etc., I'm really interested in the Q&A. And of course, I have to sift through stuff because the analysts will ask some stupid questions about next quarter. You know, do you expect to beat by one penny or two pennies? That sort of thing, which is not really relevant.

But what I'm looking for is, you know, when different questions are being asked about the business and they're making different comments, I had the full future in front of me, and just how did it unfold? Did they under-promise and over-deliver, or did they over-promise and under-deliver? Are they conservative? Are they aggressive?

So in the same vein as reading the shareholder letters, the earnings calls also give us a really good sense of what the management is like. Usually, the format for these calls is that the CEO, maybe the CFO, get up and give some prepared remarks, which, as Monish says, you know, is basically what they put in their quarterly report. But then after that, it's all Q&A. And as Monish says, that's where we learn a lot about the management team. Again, what did they promise a few years back? How did they perform? You know, did it sound as though they were just trying to sell the company?

Now, listening to the earnings calls is an important habit to form because it helps you judge the two main characteristics of company management—which is skill and integrity. If they have skill and integrity, then in the earnings calls, they won't over-promise, but they definitely will deliver. Again, big shout out to Ticker for actually keeping a record of the earnings call transcripts. So if you are looking at, say, Google, well, as easy as you know, just click on earnings call transcripts, and just like that, you're reading exactly what went down during the latest earnings call. Or you can do what Monish says and just scroll back as far as you want and read a transcript from 10 years ago. Super useful tool, so definitely read the call transcripts.

And with that said, let's listen in to Monish's final step in this screening process. We can then look at the proxies because that gives me a good feel for the, you know, stock dilution and comp plans and all of that—how that is playing out. And then after all of that, if I'm still interested, then we start plowing into the financials and, you know, different parts of the annual report, risk factors, and so on.

So, that's usually the journey. The final step is to check out the proxies, aka the DEF 14A form. This is the document that explains how the management team is compensated. What do they have to do to earn their bonuses? How much stock do they own or get given, etc.? This is another crucial step because you want the management's incentives to align with the long-term shareholders.

AKA, you want modest salaries and bonuses related to the long-term success of the business and the long-term success of their shareholders. Furthermore, we want the CEO to have a decent stake in the business so that their wealth is directly tied to how well they can grow that company. Ultimately, if the CEO gets a big fat salary and has no stake in the company, and their compensation does not really change based on how well the business or the shareholders do, that's when you need to run.

So, that's the last step in the process. And finally, if we pass all of those checkboxes, we can then start to, you know, dig into the financials, the valuation, etc. Overall, guys, that's the easy process that you can use to kind of find high-quality businesses relatively quickly. You know, in the space of a couple of hours, you've got a good idea of three out of the four pillars of the Warren Buffett approach. You'll understand the business because you know it's in your circle of competence and you've done the reading.

You'll understand the moat from reading what other investors like Warren Buffett, etc., think about the business. You'll have checked the management team through the shareholder letters and the earnings calls and the proxies. And then the last thing to do is to properly go deep into the business: analyze the expected future growth, check out the financial statements, and then come up with your own valuation.

But with that said, guys, thanks very much to Ticker.com first of all for sponsoring this video. As you can probably tell, this website is actually pretty damn useful for value investors, and most of the functionality is free, so I definitely recommend you just check it out. But apart from that, guys, thank you very much for watching this video. Leave a like on it if you did enjoy; subscribe if you'd like to see more, and I'll see you guys in the next video.