It’s easy to like Warren Buffett. Despite amassing a nearly $66 billion fortune, he remains folksy and accessible. He’s not perfect — but then again, he’s also rarely wrong. 

But one important thing to keep in mind when studying Warren Buffett is understanding that Buffett would not be where he is today without Charlie Munger, his business partner. 

Munger may not be as famous as Buffett, but he has been instrumental in not only Berkshire Hathaway’s success — but also Buffett’s evolution as an investor.

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Warren Buffett came up as a disciple of Ben Graham, the father of “value investing”. This can be basically defined as buying stocks trading for dirt-cheap valuations. And it was this approach that led Buffett’s investment partnership to acquire Berkshire Hathaway in 1965.

Back then, Berkshire was a failing textile manufacturer. The stock was selling for around $7.50 per share, a major discount from the per-share working capital of $10.25 and book value of $20.20. Buffett also noticed that the company was using the proceeds from closing down some of its plants to repurchase shares. 

So Buffett quietly began purchasing shares until Berkshire’s then-CEO issued a tender offer to buy back shares for $11.375. This would have given Buffett a weighted return of about 40% in less than two years. 

Instead, Buffett decided to purchase more shares, increasing his stake from 7% of the company to 40%. This was classic value investing in action, but Buffett has since said it was one of the “dumbest” investing moves he ever made.

Let that sink in for a second. Warren Buffett said Berkshire Hathaway was a dumb investment.

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Here’s what my colleague Jimmy Butts, Chief Investment Strategist of Top Stock Advisor, had to say about this to readers:

As a disciple of Benjamin Graham, Buffett was taught how to identify a company that was trading at a significant discount to its net assets, and whether it was a worthy investment. He dubbed this investment style as his cigar-butt strategy, and this framework for value investing served him quite well in his early years. For example, had his ego not gotten the better of him, his investment of Berkshire Hathaway would have turned out to be exceptional. According to his newsletter, had he simply accepted the $11.375 offer, his weighted annual return on the investment would have been about 40%, an incredible return in less than two years. Remember, Buffett knew that the textile business had its problems, but he was picking up shares of the company for a fraction of what they were worth. This strategy of buying mediocre companies trading at bargain prices worked well in the short-term. But this cigar-butt strategy wasnt the way forward for someone who wanted to build a large and enduring firm. Dont get me wrong, Im not saying value investing doesnt work — it very much does. Its just that thanks to Buffetts longtime business partner they found a better way…

It was Munger who taught Buffett that while buying decent companies at cheap prices was good, it was far better to “buy wonderful businesses at fair prices” and hold on to them “forever.”

That’s exactly what Jimmy preaches in Top Stock Advisor: Find excellent companies trading at good prices that can compound their earnings and reward shareholders for many years.

It’s this change in philosophy that led Buffett to make investments in names like Coca-Cola, American Express, Wal-Mart and many others. It’s also what led Jimmy to his most recent recommendation in Top Stock Advisor — a stock we’ve referred to for years around the StreetAuthority office as “The Stock That Never Goes Down”.

The Stock That Never Goes Down
I won’t give away the name of Jimmy’s pick today out of fairness to his Top Stock Advisor readers. Instead, I want to highlight the characteristics of this company that has made it such a wonderful business and a “no-brainer” to own for the long-term.

Over the last 10 years, this well-known company has grown revenue at an average rate of 6%. That may not sound like anything to write home about, but take a look at the revenue chart below — and pay particular attention to the years of the financial crisis in 2007-2008:

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As Jimmy points out, it may not be one of the sexiest stocks around, but the company consistently grows through good times and bad. 

This is only part of the reason we call it the stock that never goes down. And out of fairness, the stock did pull back during the financial crisis. But take a look at the chart below:

 

That’s about as sexy of a price chart you’ll ever come across. Shares of the company have steadily climbed and have rewarded shareholders year after year. 

Here’s more from Jimmy:

One of the many great things about [the stock] is that management has a firm grasp on what the company does. I know you may think that most companies should know that, but if they did youd see more acquisitions work out. Think of when Microsoft (Nasdaq: MSFT) bought Nokia. A software firm thought it should dive into the phone business… only to write it off as a massive loss (roughly $7.6 billion impairment charge). Instead of venturing out of its wheelhouse, [the company] focused on improving margins, cash flow and shareholder value. Take gross margins, for example. In 2000 the firms gross margins came in around 42%. Today, theyre nearly 53%. In the last decade, [the company] has improved operating margins from around 17% to nearly 20%. That might not seem like much. But think of it this way: For every $10,000 of products sold it gets to keep an extra $300. On $10 billion in revenue thats $300 million in profits it wouldnt have had otherwise. And to top it off, [the company] is a cash cow. Over the last decade (through the financial crisis) the compounded annual growth rate for free cash flow (FCF) is 6.3%. Approximately 10% of revenue trickles down into FCF. Remember, FCF is money left over after the company has paid for all operating expenses and capital expenditures. This is money that management can use to increase shareholder value. Last year, it generated more than $1 billion in FCF.

It’s no wonder then that management has consistently reduced share count through buybacks — even before it became the trendy thing for companies to do in this low-rate environment. When you have good management that has consistently executed year after year at growing every single important financial metric, then it becomes a no-brainer to use excess cash to buy back shares and reward shareholders with a bigger piece of the earnings pie. 

As you can see in this chart, this company has reduced shares outstanding by 58% over the last 10 years, returning more than $10 billion to shareholders in the process.

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This is a truly impressive figure. It means that shareholders who bought 10 years ago now own a bigger piece of the pie (58% bigger to be exact) without ever having to buy another share.

So we’ve established that this is a fantastic company. And in his recent analysis, Jimmy went on to show how the stock in question was trading for a more-than-reasonable price. The company also outperforms its peers on average in nearly every important metric. 

Although I didn’t reveal the name of the company Jimmy recently added in Top Stock Advisor today, I hope you’ll understand the takeaway. When you find an extremely well-run business that historically rewards shareholders — and it’s trading for a reasonable price — you pull the trigger.

If you’d like to get the name and ticker symbol of this stock — as well as the rest of Jimmy’s picks in Top Stock Advisor, simply visit this link.