Money

Here's how Warren Buffett spots a great investment

Berkshire Hathaway chairman and CEO Warren Buffett enjoys an ice cream treat from Dairy Queen before the company's annual meeting.
Rick Wilking | Reuters
Berkshire Hathaway chairman and CEO Warren Buffett enjoys an ice cream treat from Dairy Queen before the company's annual meeting.

Billionaire investor Warren Buffett compares investing to knowing your sweet spot when swinging at a baseball.

In terms of what opportunities the Berkshire Hathaway chairman and CEO likes to swing at, he has a few guidelines.

"We sort of know it when we see it," Buffett said during the the Berkshire Hathaway 2017 Annual Shareholders Meeting. "It would tend to be a business that for one reason or another we can look out five or 10 or 20 years and decide that the competitive advantage that it had at the present would last over that period."

Besides considering what a company will deliver over time, "it would have a trusted manager that would not only fit into the Berkshire culture, but was eager to join the Berkshire culture," said Buffett. "And then, it would be a matter of price."

He gives the example of one of the first outstanding companies Berkshire Hathaway bought: See's Candies, which Buffett and longtime business partner Charlie Munger purchased in 1972 for $25 million.

"The question when we looked at See's Candies in 1972 was, 'Would people still want to be both eating and giving away that candy in preference to others candies?'" Buffett told the meeting's 40,000 attendees.

He and Munger bet the answer would be yes: "It was only because we felt that people would not be buying necessarily a lower price candy. I mean it does not work very well if you go to your wife or girlfriend on Valentine's Day — I hope they're the same person — and say, 'Here's a box of candy, honey. I took the low bid.'"

Warren Buffett (L) and Berkshire-Hathaway partner Charlie Munger
Eric Francis | Getty Images
Warren Buffett (L) and Berkshire-Hathaway partner Charlie Munger

Their bet paid off. Since Berkshire Hathaway bought the company, it has generated about $2 billion in pre-tax earnings.

"We made a judgement about See's Candies that it would be special in — probably not in the year 2017 — but we certainly thought it would be special in 1982 and 1992 and fortunately we were right about that," said Buffett. "And we're looking for more See's Candies, only a lot bigger."

Don't miss: Warren Buffett: Getting rejected by Harvard was the 'best thing that ever happened to me'