As many know that it's an insightful experience to just read through Berkshire Hathaway's annual report. Not to mention, it's actually pleasant to read! I'm just reading through what the Warren Buffett has to say in the 2007 annual report. I will share some of his wisdom with those who don't have the time and enthusiasm to do so.

In his own words,  "what kind of business turns us on", have the following criteria.

1. A business that we understand. This seems obvious but most of us don't always apply this basic concept. Out of greed, we often start by looking at where the returns are and start chasing after them. Without doing enough due diligence and homework about the business, we often jump into those businesses simply because they hot. For most of us, if we were just looking for businesses that we understand, we would end up with companies like supermarkets, pharmacies, cinemas or coffee shops. Pretty boring indeed. How are you going to make a tons of money from buying companies that grow says at a rate of 3% a year! Even for superstar fund manager like Peter Lynch believes that great opportunities lie in front of us. So stop chasing what's hot in the news!

2. A favorable and  enduring long term economics. Great business have an enduring "moat" that protects the returns on investments of companies. In the 2007 annual report, the Buffettology rules out companies in industries prone to rapid and continuous change. This includes biotech, internet, wireless networking and many more. Such industries usually have high margins and this will attract alot of competitors. Margins will erode and that will affect the bottomline. Companies with good management like Dell, Microsoft or Nokia are exceptions. They are the exceptions because they have good management, I'd say stay away from the Hot industries.

3. An able and trustworthy management. In this greedy world when CEOs are raking in few hundred millions of dollars in annual compensation while the stocks are not performing, it's getting harder and harder to find companies with great management. If you do find one, keep a close eye on the company and buy it when it's at a good price. Managers and employees all have to work in the same interest as the shareholders. Look for companies that provide this structure that aligns all the interests together.

4. A sensible Price tag. It's better to buy a good company at a fair price than to buy a fair company at a good price. A great investment is always about buying them at a good price no matter how good the company is.

Warren brought an interesting topic about the airline industry and its elusive competitive advantage. He pointed out that airline companies need heavy capital investments every year and despite all the money invested, profit margins remain thin. Avoid Airlines at all cost. For those who are lazy to look into the financials of certain companies of industry over the long period of time, here's a quick acid test on finding good long term investments. Mind you, it should be a the first step to your homework.

The trick...

Oh here's the secret...by quickly glancing at a long term chart of the stock, you can determine its long term investment returns. The chart must be pointing upward. If not up, then right away, I go on to the next thing. Otherwise why would I even put my money in it. Here's an example of a 20 year chart of Air France/KLM. 

 And now we have Johnson & Johnson (JNJ). See what I mean?!

Cheers!