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
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).
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.