Ten tips for buying great businesses

Investing is simple but it is not easy.  Sounds contradictory right but it isn’t.  Let me explain why.

There aren’t many truly great businesses in the world.  However, most people know of great businesses.  I asked my thirteen-year-old stepson Marcos to name five great businesses he knew.  He immediately spouted out the following five companies’ names: 

Google 

Amazon

Samsung 

Apple 

Volkswagen

Not a bad list for a thirteen-year-old but I am mystified why he chose Volkswagen over Tesla which both I and his mother drive!  Still, that’s the brain of a thirteen-year-old I suppose.

As an adult, I have a more sophisticated approach to investing in great businesses than Marcos as you would expect.

Based on my years of experience as a fund manager, these are my ten tips for buying great businesses;

1. The business has a moat (a competitive advantage).
2. A visionary founder owner who still works in the business.
3. The directors/management have skin in the game (a shareholding of at least 10%).
4. The business has huge scalability, in other words, it has a massive totally addressable market meaning it is a global business.
5. Its turnover, profits and free cash flow must be growing significantly each year.
6. It must have a high return on investment.
7. The business must have a low weighted average cost of capital in comparison to its return on investment.  Ideally, non-dividend paying.
8. Do not pay too much to buy the business.  Calculate the intrinsic value (true value) of the business.
9. Base the buying decision on the multiple of its free cash flow per share compared to the share price rather than on its PE ratio or any other measure of value.
10. The management is trustworthy, inclusive, has integrity, is patient and uses a deferred gratification strategy.

Once you have found a business that meets the above criteria never sell it unless it no longer ticks all of the boxes, for example, it has lost its competitive advantage, its founder-owner has retired or its market sector has become disrupted.

Your goal has to be to buy and hold great businesses long-term.  You are not buying shares.  Instead, you are investing in great businesses long term as a business owner.

All of the great businesses in the world like Amazon tick all of the above ten boxes. All of the greatest fund managers in the world like Warren Buffett invest in these kinds of businesses. It’s a successful investment formula.

So stop investing and become a business owner instead.  A great business owner. You know it makes sense.*

Anthony Byrne, Managing Director

The Fund is authorised in the United Kingdom and regulated by the Financial Conduct Authority (FCA) Firm Reference Number:754570.

If you’re interested in learning more about this topic, I encourage you to visit our website:

Minerva Money Management

More information about the fund can be found here Hargreaves Lansdown or AJ Bell.

* RISK WARNING

The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.