Three Reasons to Invest in Established Companies

  NEW YORK (TheStreet) -- There is a reason that the portfolio of Warren Buffett's Berkshire Hathaway  (BRK.B) is stuffed with industry leaders such as Walmart (WMT), Exxon Mobil (XOM), Wells Fargo (WFC) and Coca-Cola (KO), among others.

Three reasons have to do with Buffett's investing dictate -- "It is better to buy a wonderful company at a fair price than a fair company at a wonderful price."

The first is that the best got to be that way for a reason: They established strong brands. Coca-Cola, Walmart and Exxon Mobil are examples of that. Those brands have staying power which give the companies a competitive edge.

Next is that "creative destruction" is for venture capitalists, not investors.

Venture capitalists prosper by getting in early and staying late with that rare company that becomes the next Amazon (AMZN) or Google (GOOG).

Creative destruction destroys the previous economic order, as Amazon did to retail and Google did to other search engines. For those who pick right, the rewards can be huge. But the average venture capital firm fails to return investor capital after fees.

There is plenty of fluctuation in the prices of established industry leaders that allows for buying low, however. As examples, Caterpillar (CAT), the biggest heavy equipment maker in the world, and BHP Billiton (BHP), the largest natural resources entity, have both moved 50% more than the stock market as a whole, giving investors an opportunity to purchase shares at a discount.

Finally, finding a good investment doesn't necessarily mean finding the biggest company in a sector, but the best one, or one of the best. Those companies reward shareholders over the long term.

For example, Berkshire Hathaway's latest acquisition could be considered a small cap as AltaLink LP, a Canadian electrical transmission company, cost $2.9 billion. Buffett's favorite investment, See's Candies, was purchased for just $25 million in 1972. See's Candies now has total sales of about $2 billion.

So, how to find the best?

Checking out the holdings of Berkshire Hathaway or another successful investment firm and buying whenever any stumbles could work. Shares of Wells Fargo, Buffett's favorite bank, trade at about $50. In early 2009, the stock was under $10.

Another way is to buy when big oil stocks slide: When was the last time one went under?

When the share price of an income stock falls, the dividend yield rises. Setting a target yield for a company that has a history of increasing its dividends annually such as Walmart or Coca-Cola should result in a robust total return long term.

>>Read More: Caterpillar Will Plow Ahead Despite Fraud Setback

>>Read More: Bite Into Walmart if Stock Falls in Wake of China Meat Recall

>>Read More: Two Stocks Whose Short-term Pains Will Bring Long-Term Profits

Jonathan Yates does not have a position in any of the securities mentioned in this article.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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