One of the richest men in the world and CEO of Berkshire Hathaway, Warren Buffett, is pulling back the curtain to reveal some secrets to success. Buffett is known for making some of the best investments and has investors looking to follow in his footsteps, and he reveals some of the best businesses to own.
Buffett once said, “[T]he best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.” Following this model, there are a couple of companies considered a wise investment with return capital above 15%.
To no surprise, the technology giant Apple generates a five-year return investment capital of 26% compared to rival tech companies such as Sony with 7% and Nokia with 12%. Apple can credit its success to the loyalty-commanding brand, the exclusive iOS operating system only available for Apple products, and high switching costs.
Apple’s success is all in the numbers. The recent quarter showed a massive revenue increase by 36% to a whopping $81.4 billion and generated $21 billion in operating cash flow, returning $29 billion to shareholders. Apple is also growing as an international brand with emerging markets in Mexico and India to ensure Apple’s long-term growth path.
Another successful investment is the home improvement company The Home Depot, with a consistent return on invested capital on average of 30%. Home Depot has returned over $55 billion to shareholders with share repurchases and dividends over the past five years.
The economies of scale determine the success of Home Depot, concise merchandising, being a well-recognized brand, and management producing above-average operating metrics. These factors contribute to rewarding shareholders with consistent growth.
Another wise investment is the technology company and one of Apple’s biggest competitors, Microsoft, which was one of the first big technology companies founded in 1975. Microsoft has the advantage of being in the technology industry longer than the competition and offers nearly every technology device imaginable.
Microsoft has a solid five-year return on average of 20% for invested capital through the monopoly of the Windows and Office programs while expanding in the fast-growing public cloud industry. Microsoft stock is considered a risk/reward tradeoff option through increasing its product line.
According to the June quarter report, net income for Microsoft increased to 47% with $16.5 billion, and revenue increased to 21% with $46.2 billion, with the Cloud segment increased to 35% with $3.9 billion. The Cloud segment helps improve the company’s profit with a great demand for the cloud computing service Azure.
These companies are lucrative to invest in with high share prices, but some trading services offer partial stocks that are more affordable for beginner investors.