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What Warren Buffett Looks For In A Growth Stock

During his tenure as head of Berkshire Hathaway, Warren Buffett has been basically a growth stock investor. Many have tried to do the same thing, few have succeeded. There are growth traps, just as there are value traps. Here are some of the things that distinguish Buffett from the less successful ones.

1) As pointed out in a previous piece, the "market" as a whole, grows, and at double digit rates, four years out of five, or eight years out of ten. But those two bad years make the difference between "double digit" and a 5.5% annual average. Buffett's growth holdings, like Coke and Proctor and Gamble, can actually grow ten years out of ten, and (formerly, at least) at double digit rates.

2) The company has pricing power over its main product (in the manner of See's Candy), giving it the ability to largely charge "what the market will bear."

3) The company has a high return on equity (ROE), giving it a strong "margin of safety" in its profitability.

4) The company is reasonably well diversified, both productwise, and geographically, allowing it to smooth out inevitable local economic fluctuations.

5) The company accomplishes all of the above, while maintaining a strong balance sheet; that is, without using an inordinate amount of debt, because of a high need for reinvestment. The exception to this rule would be when the company is making an acquisition that represents a quantum jump; such as Cap Cities' 1985 purchase of ABC.