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Warren Buffett: Why It Does Not Always Pay to Buy Transformative Business Inventions

When it comes to picking investments, Warren Buffett (Trades, Portfolio) does not like to take significant risks. He has never tried to pick companies or stocks that could be the next big thing.

Instead, the Oracle of Omaha likes to invest in companies with an already established market position. He wants to own companies that have shown in the past that they know how to look after their investors, and are likely to continue this trend going forward.

He explained why he followed this mentality in 1999. At the time, the stock market was riding high as the dot.com bubble reached its peak.

Investors all over the world were rushing to buy stocks of companies that seemed to be at the forefront of technological expansion. They were willing to pay whatever price the market demanded to grab a small share of this revolution.

Buffett, on the other hand, didn't get caught up in the market euphoria. He stayed true to his strategy and sat on his hands. At the time, this attracted plenty of criticism from detractors who thought that he would live to regret one of the biggest stock market bubbles of all time.

But that wasn't the case. Buffett was right to remain on the sidelines and wait for the right opportunity to buy.

His thoughts on the technological revolution were compiled by Carol Loomis and published in Forbes Magazine in 1999. According to the article, the CEO of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) expressed these opinions across a series of small meetings throughout the year.

In these meetings, Buffett highlighted the birth of the automobile and aviation industries as two truly transformative business inventions of the early 20th century. However, while these inventions completely transformed the world, those investors who were unlucky enough to have put their money into these industries suffered significantly. As Buffett explained:

"The other truly transforming business invention of the first quarter of the century, besides the car, was the airplane--another industry whose plainly brilliant future would have caused investors to salivate. So I went back to check out aircraft manufacturers and found that in the 1919-39 period, there were about 300 companies, only a handful still breathing today. Among the planes made then--we must have been the Silicon Valley of that age--were both the Nebraska and the Omaha, two aircraft that even the most loyal Nebraskan no longer relies upon.

I won't dwell on other glamorous businesses that dramatically changed our lives but concurrently failed to deliver rewards to U.S. investors: the manufacture of radios and televisions, for example. But I will draw a lesson from these businesses: The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors."

Two decades later, these comments remain just as vital as they were at the turn of the century.

One of the great things about being an investor is that you never have to make a trade. There are plenty of companies out there that look as if they might change the world, but that doesn't mean we all have to buy the stock.

When considering these companies, it is best to keep Buffett's advice in mind. It doesn't matter how much an industry is going to affect society or grow, if a company doesn't have a competitive advantage, it is unlikely to be a good investment over the long run (although it might be a good speculative gamble).

Disclosure: The author owns shares in Berkshire Hathaway.

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This article first appeared on GuruFocus.