Buffett’s Investments in Franchises

A long-term durable competitive advantage in a stable industry is what we seek in a business.

I look for businesses in which I think I can predict what they are going to be like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people chew gum.

—Warren E. Buffett

Old, established and Predictable

Predictable products equal predictable profits. It seems Buffett loves OLD, ESTABLISHED companies. Note the proclivity in his private life to repeat what he likes—burgers and Cherry Coke with Sees’ Candies frenzy as desert.

(Read/listen to Buffett discuss Coke and P&G during his lecture at the University of Florida: http://wp.me/p1PgpH-1N and the videos start: http://www.youtube.com/watch?v=ogAxzPaU5H4

Note the difference between Buffett’s style and Venture Capital investing:
Two VC’s explain their company: http://www.youtube.com/watch?v=3iQTvJIGArc&feature=related

We are studying competitive analysis in case studies to help us determine the strength and durability of a company’s future cash flows (depth and width of moat). Eventually we will circle back to tie franchise analysis in with valuation.

Warren Buffett selectively buys stocks when others are rushing to sell. And he has cash when others don’t as in 1973/74 thanks to his closing up his investment partnership in 1969. When Berkshire had $37 billion in cash, he pounced during the crash of 2008/2009.

Note the franchise and non-franchise companies

EPS       EPS          EPS              EPS
Year              Coke       JNJ          Ford     Adv. Micro Dev.
2011              $3.85     $4.85       $2.00           $0.55
2010              $3.49     $4.76       $1.66           $0.64
2009              $2.93    $4.63       $0.86            $0.45
2008              $3.02     $4.57     -$6.50          -$4.05
2007               $2.57     $4.15      -$1.43          -$5.09
2006              $2.37    $3.76       -$6.72          -$0.28
2005               $2.17    $3.50       $0.86            $0.37
2004              $2.06     $3.10       $1.59           $0.25
2003               $1.95     $2.70      $0.35          -$0.79
2002               $1.65     $2.23       $0.19           -$3.81
2001               $1.60      $1.91     -$2.95            -$0.18
TOTALS  $27.66  $40.16  -$10.09      -$11.94

Johnson & Johnson http://www.scribd.com/doc/78158910/JNJ-35-Year-Chart

Advanced Micro Devices http://www.scribd.com/doc/78159095/AMD-35-Year-Chart

Ford: http://www.scribd.com/doc/78159068/Ford-35-Year-Chart

Coca-Cola: http://www.scribd.com/doc/78158885/Ko-35-Year-Chart

Now, the charts do not imply that purchasing a franchise company at any price is wise, but look how profitable growth puts time on your side vs. the non-franchse companies.

When the market crashes, Buffett isn’t buying the Grahamian bargain he cut his investing teeth on. Instead, he is focusing on the exceptional businesses–the ones with a durable competitive advantage (DCA).

Arguments/Discussion/Disagreements

A few readers preface their remarks with an apology for disagreeing with my comments. Don’t. The purpose is to learn not be right.  If you reason with logic and facts you will convince like this: http://www.youtube.com/watch?feature=fvwp&NR=1&v=1jQP0Y2T2OQ

There is no point in discussing an opposing view with a person who acts on blind faith or belief rather than reason: Frailty: http://www.youtube.com/watch?v=Y_rVU40BTw4&feature=relmfu

Please feel free to disagree, but I warn you the last person to do so met this fate: http://www.youtube.com/watch?v=QHH9EYZHoVU  And I want….. http://www.youtube.com/watch?v=WcxiEOqk_w4

Remember today is Friday the 13th; be careful.

3 responses to “Buffett’s Investments in Franchises

  1. Finally, Have downloaded all the lectures and case studies… arranged them in proper way.. now time to dive in.. Will try to be an active contributor..

  2. Hi, can I ask, did you take the EPS data from the book by Mary Buffett and David Clark?

    According to data available on the co reports and other sources this is incorrect. I have built an excel sheet to analyse company’s and their possible future value according to the ‘The Warren Buffett Stock Portfolio’ where you seemed to have pulled this from. Can you please shed some light on the figures. I have looked everywhere for consistency and emailed David and Mary to try to get some light on the matter.

    Much appreciated.

    Tom

  3. Dear Tom:

    Yes, I think so, but even if the figures are off by a bit, you can go to Value-Line and put together EPS figure or use the EPS line in the linked charts. The general concept is what is importnat not whether Coke’s earnings werre $1.35 or $1.40 in a particular year. Invest (all things being equal) in good businesses and avoid the bad.

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