by Dave Coker

Created on: June 25, 2008

Anyone who has has dabbled in the markets knows picking stocks is difficult, but exactly how hard is it? Well, with over 6,500 individual stocks traded in the United States today, picking winners from losers is hard just because there are so many choices.

And once you've selected a stock, put your hard earned money on the table and bought some shares, how can you be sure that the choice is going to pay off five, ten or even twenty years from now? In other words, how can we pick stocks for long term investment?

Whenever tough questions like this arise it's best to look to seasoned experts for answers. And to pick winning stocks for the long term, look no farther than legendary value investor Warren Buffett. Buffett has not only thought long and hard about selecting stocks, but - lucky for us - he's talked about it enough that we can benefit from his success.

So how does someone like Warren Buffett do it? How does he select stocks for the long term? In this article we'll identify eight key factors Warren Buffett considers.

For each factor we present a relevant Warren Buffett quote, discuss the concept in a little more detail, then summarize with a rule.

SELECTING STOCKS FOR THE LONG TERM

VALUE

"Price is what you pay. Value is what you get."

First of all, Buffett likes to buy cheap companies. That doesn't mean they are inferior enterprises, rather good value.

To do this he looks at the value of the underlying business, revenue, assets and earnings. He also looks at the company's break up value; that is, if all the divisions were to be sold off individually, what would the sum total received be? Would the sum be more or less than the price of the business? It all the various divisions are worth more than the company, the stock is a good buy.

Rule: only purchase a stock when we get good value, in other words, when we pay less than what that business is really worth.

PROFITABILITY

"The investor of today does not profit from yesterday's growth."

Like us, Buffett buys shares because he wants them to increase in value. Companies don't increase in value unless they are profitable (ignoring hostile takeovers and other, unusual events). And Buffett not only likes profits, he likes profits that are increasing, as increasing profits increase the value of a company.

So to determine if the company passes this test, Buffett looks at current and past profitability. He looks at the change in profitability; is this company's profits increasing or are earnings static, perhaps shrinking? Finally,

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