Warren Buffett has built his fortune by buying shares in businesses he believes can compound wealth over many years. While the Oracle of Omaha doesn’t typically buy ASX shares, his investing principles can still help Australian investors identify potentially attractive shares.

Here are five things to look for.

Buy businesses you understand

Buffett has repeatedly stressed the importance of staying within his circle of competence.

That means understanding how a company makes money, what drives its earnings and what could threaten its competitive position.

On the ASX, that could mean favouring familiar businesses such as Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW) or Wesfarmers Ltd (ASX: WES), provided their valuations make sense.

The point isn’t to buy familiar names blindly. It’s to avoid investing in ASX shares you can’t properly assess.

A durable competitive advantage

Buffett’s famous economic moat is central to his strategy. I’d look for ASX shares with something that makes it difficult for competitors to steal customers and profits.

That could be a powerful brand, network effects, switching costs, intellectual property, scale or a structural advantage in an industry.

A company with a strong moat can potentially maintain attractive returns on capital for years.

Consistent earnings and cash flow

Great stories aren’t enough. I’d want to see evidence that a business can consistently generate profits and cash.

Strong cash flow gives companies more flexibility to reinvest in growth, reduce debt, pay dividends and potentially buy back shares.

This is particularly important when looking for long-term compounders. A business that repeatedly needs fresh capital to survive isn’t the sort of ASX share Buffett typically favours.

A strong balance sheet

Debt can magnify returns when things go well — and magnify problems when they don’t.

Buffett has long emphasised financial strength and the ability of businesses to withstand difficult economic conditions. I’d therefore examine a company’s debt levels, interest costs, cash position and ability to meet its financial obligations.

A robust balance sheet can give an ASX share the flexibility to take advantage of opportunities when weaker competitors are struggling.

A sensible valuation

Perhaps the biggest mistake investors can make is confusing a great business with a great investment. Even an exceptional company can produce disappointing returns if investors pay an excessive price.

I’d therefore compare the price of an ASX share with earnings, cash flow, growth prospects and the company’s historical valuation.

Buffett doesn’t try to predict what a share will do next month. He focuses on whether the price makes sense relative to the underlying business.

The Buffett test

Finding Buffett-style ASX shares isn’t about discovering a secret formula. I’d look for understandable businesses with durable moats, reliable cash generation, strong balance sheets and attractive valuations.

Then comes the hardest part: having the patience to let those businesses compound.

As Buffett’s strategy demonstrates, successful investing is often less about finding the next hot ASX share and more about avoiding bad businesses and paying too much for good ones.

The post 5 things Warren Buffett looks for before buying ASX shares appeared first on The Motley Fool Australia.

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Motley Fool contributor Marc Van Dinther has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Some businesses make me comfortable looking well beyond the next year or two.

I think the three ASX shares below have strong positions in their markets and clear ways to keep growing for many years.

Here is why they would be on my long-term buy list.

REA Group Ltd (ASX: REA)

REA Group owns one of the most powerful digital platforms in Australia through realestate.com.au.

People looking to buy, sell, or rent property naturally want to use the website with the most listings. At the same time, property agents want to advertise where the largest audience is searching.

I think that gives REA Group a strong competitive position that would be difficult to replicate.

There is also more to the opportunity than simply attracting property listings.

REA Group can keep improving the tools available to buyers, sellers, and agents, including property data, personalised recommendations, and artificial intelligence. It can also build closer relationships with people as they move through the property journey, including when they need financing.

Australia should continue adding people and homes over the long term, giving REA Group an expanding market to serve.

For me, the combination of a powerful brand, enormous audience, and opportunities to make the platform more valuable makes REA Group a business I would be comfortable owning for many years.

SiteMinder Ltd (ASX: SDR)

Another ASX share I would buy and hold is SiteMinder. It gives hotels the technology they need to sell rooms and manage their presence across online booking channels.

I like the long-term opportunity because the global accommodation market remains highly fragmented.

Large hotel chains may have substantial technology budgets, but there are countless independent hotels and smaller accommodation providers that still need better ways to manage pricing, bookings, distribution, and guest relationships.

SiteMinder can bring many of those functions together through one platform.

I also like that the company has been expanding what its technology can do. Products such as Channels Plus and Dynamic Revenue Plus are designed to help hotels reach more travellers and make better pricing decisions.

Artificial intelligence could make those tools even more valuable by helping hotel operators automate more of the work involved in managing rooms and responding to changing demand.

If SiteMinder can keep adding properties while increasing the amount of technology each customer uses, I think the business could have a long growth runway ahead.

ResMed Inc (ASX: RMD)

ResMed is an ASX share operating in an area of healthcare where I think demand could continue expanding for decades.

The company develops devices and masks used to treat sleep apnoea, a condition affecting a huge number of people worldwide.

What I like is that the relationship with a patient can continue well beyond the initial sale of a device.

Masks and other components need replacing, while ResMed’s digital platforms can help patients and healthcare providers manage treatment over time.

That creates an opportunity to keep serving existing patients while also reaching people who have yet to be diagnosed or treated.

Greater awareness of sleep health could help with that. Improvements in diagnosis and easier access to treatment could bring more people into the market over the years ahead.

Foolish takeaway

The businesses I most enjoy owning are those where I can see several ways for the company to be stronger five or 10 years from now.

For me, REA Group, SiteMinder, and ResMed are three shares I would be happy to hold patiently for the long term.

The post 3 excellent ASX shares I would buy and hold for 10 years or more appeared first on The Motley Fool Australia.

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• How I’d use ASX growth shares to build long-term wealth
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• 3 ASX shares I’d buy if I could only check my portfolio once a year
• How to find ASX shares that Warren Buffett might buy

Motley Fool contributor Grace Alvino has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ResMed and SiteMinder. The Motley Fool Australia has positions in and has recommended ResMed and SiteMinder. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

There are various ways that Australians can invest in ASX shares for passive income. We can invest in our own names, through a company, a trust, superannuation and so on.

Investing for passive income through superannuation makes sense for various reasons, with the low tax rate being a key benefit.

Keep in mind that the net income we receive from our investments is what we receive after taxes. It’s possible that an Australian working full-time could lose a third of their passive income to tax, or more, depending on their tax rate.

Based on that, investing in superannuation is a more appealing prospect due to that lower tax rate.

Super has a lower tax rate in the accumulation phase compared to normal individual tax rates for a full-time earner. In retirement, the tax rate could be 0%.

Every Australian’s tax position is different, so I’ll just talk about targeting a certain income level, without mentioning tax any further.

How much is needed in superannuation for $5,500 of monthly passive income?

Receiving $5,500 per month of dividends translates into $66,000 annually. I’m sure most Australians would love to receive that level of dividends each year without needing to do any ongoing work for it, assuming they don’t already receive that much each year.

A key question is deciding what sort of investments Australians want to own and the dividend yield attached to those stocks.

For example, a portfolio with a dividend yield of 6.6% can be half the size of a portfolio with a dividend yield of 3.3%.

For example, if a portfolio is $1 million in size with a 6.6% dividend yield, it would create $66,000 of annual passive income. If a portfolio had a dividend yield of 3.3%, the portfolio would need to be $2 million in size to make the same level of income.

If the portfolio had a dividend yield of 5%, the portfolio would need to be $1.32 million in size to generate an average of $5,500 per month of monthly passive income.

The final dividend yield we’ll look at is 4%. It would take a portfolio value of $1.65 million to unlock $66,000 of annual dividends.

The sorts of ASX dividend shares I’d look at

There is a wide range of ASX dividend shares available for superannuation investments, investing in our own name or other structures.

Some of the lower-yielding stocks I’d look at are Wesfarmers Ltd (ASX: WES), Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), L1 Long Short Fund Ltd (ASX: LSF) and Lovisa Holdings Ltd (ASX: LOV).

Some of the mid-range yielding stocks I’d consider for passive income include WCM Quality Global Growth Fund (ASX: WCMQ), Telstra Group Ltd (ASX: TLS), Rural Funds Group (ASX: RFF) and Centuria Industrial REIT (ASX: CIP).

Among the higher-yielding ASX dividend shares I’d consider are WCM Global Growth Ltd (ASX: WQG), Charter Hall Long WALE REIT (ASX: CLW), Dexus Industria REIT (ASX: DXI), Future Generation Australia Ltd (ASX: FGX), Future Generation Global Ltd (ASX: FGG) and PM Capital Global Opportunities Fund Ltd (ASX: PGF).

The post How much is needed in superannuation to target a $5,500 monthly passive income? appeared first on The Motley Fool Australia.

More reading

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• If I invest $15,000 in Telstra shares, how much passive income will I receive in 2027?
• 16 ASX 200 shares with ex-dividend dates next week
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• How ASX dividend growth shares can build lasting income

Motley Fool contributor Tristan Harrison has positions in Future Generation Australia, Future Generation Global, L1 Long Short Fund, Rural Funds Group, Washington H. Soul Pattinson and Company Limited, Wcm Global Growth, and Wcm Quality Global Growth Fund. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa, Washington H. Soul Pattinson and Company Limited, and Wesfarmers. The Motley Fool Australia has positions in and has recommended Rural Funds Group, Telstra Group, and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Lovisa and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.