Warren Buffett earned a lot investing in stocks, but that was not the only way he earned. Besides trading stocks Warren also did business acquisitions. In fact a lot of his assets resides in the ownership of Berkshire Hathaway shares. Bershire is a conglomerate owning businesses in a wide range of sectors and also owning stock shares of multiple publicly traded companies.
Image above courtesy of HighPoint Associates illustrates what Berkshire controls and invested in. On a grand scale Berkshire itself is a publicly traded company therefore those who invest in shares of Berkshire is investing in what Warren Buffett is investing in.
Not to go too far off course the focus in today's post is how does Warren know when to invest in a company? He has a very interesting approach that could be summarized as companies worth investing if they have very good durable competitive advantage.
Durable competitive advantage is a sustainable factor that provides a business an edge over its competitors, thereby protecting the earnings power of a company from being taken over by competitors.
Sustaining and staying ahead of the competition with an advantage is the key to longevity and success of a company. Warren to analyze companies both in public and private not only on the balance sheets but also if the business is sound and has an edge.
In one talk Warren gave several examples of a company having durable competitive advantage. For example Gillette that manufacturers razors is a very good company to own.
Warren goes on to say if he was given $1 billion dollar to figure out how to use the money to beat Gillette at selling a very commonly used item, facial razor, he would not be able to figure out how to beat Gillette. He was no expert in manufacturing razors but knew even with $1 billion at his disposal he would not be able to dislodge Gillette from what it did best.
Warren has other examples the base line was any business that have been battled tested or can withstand competition from deep pocket players are worth investing in because those companies with stand the test of time and have an edge on keeping the company in profit.
There could be multiple factors as to how a company has a durable competitive advantage. It could be good personal in leadership roles, a technology edge, history of good reputation, and a mixture of these qualities.
Conclusions
The next time you are thinking of purchasing or investing in a company it maybe a good idea to think about the durable competitive advantage of the company. Determine if the company has an edge and if so can the edge/s be taken away if one has $1 billion to spend to compete against the company. Of course this is somewhat of an extreme with the $1 billion example comparison but the goal is to determine if spending money can take away the advantage of a company.
None of what I write is financial advice. It is for entertainment purposes only. Thanks for reading!
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