The Manager’s Most Important Thing: Widening the Moat

What’s the most important thing to do as a manager of a business? According to Warren Buffett it’s all about “widening the moat.” Nothing more, nothing less.

“Well, I send a letter to the managers and I talk to them about widening the moat. I say it isn’t the question of the earnings per share this quarter or anything like that. Any business that has a widening moat is gonna make a lot of money over time. They are guardians of the moat. I say a great business is like an economic castle. And if you have an economic castle in capitalism, there gonna be a bunch of people that are going to try and take it away from you. So I need a knight in that castle, the manager, who worries about protecting that castle all the time. And then I want this moat around it, and I want that moat to get wider. It may be service, it may be better product design, all kinds of things. It can be what’s in their mind about the product, a consumer product. But I want that moat to be widening. And I want people to toss sharks and piranha, octopus, everything into that moat to keep away those competitors because they’re gonna be coming and our managers are charged with that. I tell our managers, pretend that this is the only business that you and your family can own for the next hundred years, you can’t sell it and you’ve got to make this one work. And that means every day thinking about what’s going to make it a great business over a 100 years.”

(Source: 8:46 into Warren Buffett with B-School Students Interview from India)

For some input and ideas about what makes (or breaks) a moat, check out this slide deck from Pat Dorsey.

Business Quality: The Great, the Good, and the Gruesome

“A moat that must be continuously rebuilt will eventually be no moat at all.” 

―Warren Buffett

Excerpt below from Warren Buffett’s 2007 letter to shareholders. Emphasis added. 

Businesses – The Great, the Good and the Gruesome

Let’s take a look at what kind of businesses turn us on. And while we’re at it, let’s also discuss what we wish to avoid.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%. When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stockmarket purchases. It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business. In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google.

One example of good, but far from sensational, business economics is our own FlightSafety. This company delivers benefits to its customers that are the equal of those delivered by any business that I know of. It also possesses a durable competitive advantage: Going to any other flight-training provider than the best is like taking the low bid on a surgical procedure.

Nevertheless, this business requires a significant reinvestment of earnings if it is to grow. When we purchased FlightSafety in 1996, its pre-tax operating earnings were $111 million, and its net investment in fixed assets was $570 million. Since our purchase, depreciation charges have totaled $923 million. But capital expenditures have totaled $1.635 billion, most of that for simulators to match the new airplane models that are constantly being introduced. (A simulator can cost us more than $12 million, and we have 273 of them.) Our fixed assets, after depreciation, now amount to $1.079 billion. Pre-tax operating earnings in 2007 were $270 million, a gain of $159 million since 1996. That gain gave us a good, but far from See’s-like, return on our incremental investment of $509 million.

Consequently, if measured only by economic returns, FlightSafety is an excellent but not extraordinary business. Its put-up-more-to-earn-more experience is that faced by most corporations. For example, our large investment in regulated utilities falls squarely in this category. We will earn considerably more money in this business ten years from now, but we will invest many billions to make it.

Now let’s move to the gruesome. The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.

The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it. And I, to my shame, participated in this foolishness when I had Berkshire buy U.S. Air preferred stock in 1989. As the ink was drying on our check, the company went into a tailspin, and before long our preferred dividend was no longer being paid. But we then got very lucky. In one of the recurrent, but always misguided, bursts of optimism for airlines, we were actually able to sell our shares in 1998 for a hefty gain. In the decade following our sale, the company went bankrupt. Twice.

To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

Source: Warren Buffett’s Berkshire Hathaway Letter to Shareholders, 2007

* * * * * * * * * * * *

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Content in table above based to a large degree on SafalNiveshak’s article Wit, Wisdom, Warren (Issue #10): Businesses – The Good and Gruesome 

Measuring the Moat (Updated Version)

Credit Suisse’s Global Financial Strategies team has published an updated version of the report, “Measuring the Moat.” It includes new charts and examples and reflects the latest academic research.

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation 

  • Sustainable value creation is of prime interest to investors who seek to anticipate expectations revisions.
  • This report develops a systematic framework to determine the size of a company’s moat.
  • We cover industry analysis, firm-specific analysis, and firm interaction.

See here for a collection of links to other Mauboussin papers.

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Peter Thiel on the Characteristics of Monopoly

”The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

—Warren Buffett

”ESCAPING COMPETITION will give you a monopoly, but even a monopoly is only a great business if it can endure in the future.”

—Peter Thiel, Zero to One

Are you buying an asset or a franchise?

Let’s start with some thinking about investing, what you buy, and why you buy it.

In the end, for any single investment you’ll make, it’s all about the risk and inflation adjusted after tax return on invested capital net of any expenses. When you invest you are giving up money that could have been used to buy goods or services today, with the aim of (hopefully) receiving more in the (unknown) future.

One critical questions to consider and answer for each business you invest in is: “Are you buying an asset or a franchise?”

In his 1991 letter to shareholders Warren Buffett provided a definition of a franchise:

An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mis-management. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage. 

In contrast, "a business" earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management. 

(Source: Warren Buffett, Shareholder Letter, 1991)

What Buffett calls “a business,” is what I earlier named an “asset.” In theory, what Buffett calls “a business” is a business that does not have a sustainable competitive advantage, i.e., no moat, and thus is not able to earn any economic profits, i.e., a return on invested capital (ROIC) above its cost of capital (COC). The invested capital (assets) in a business like this does not generate any excess value since ROIC equals COC, and the business is only worth the value of its assets.

In contrast, a franchise is a business that earns a ROIC above its COC, and in a situation like this the earning power of the business will result in a intrinsic value exceeding the value of the assets. For this to be sustainable, and for you to go on and base your valuation from the future earning power of the business, there must be some characteristics of the business that makes it possible to defend these excess profits from any competitors that will try to take these profits away. A wide moat (sustainable competitive advantage) will make sure this does not happen—then the next question to consider is the durability of the moat, i.e., how long the business will be able to defend its excess profits. If there is no moat, incumbents have no advantage over entrants and all excess profits will be competed away—maybe not in the short term, but it will happen over the long haul.

A stock selection framework when trying to answer this question—see image below—was originally published in The Manual of Ideas: The Proven Framework for Finding the Best Value Investment, written by John Mihaljevic.

Depending on your answer to the question (asset or franchise), there are two different ways when approaching your analysis: (1) asset value analysis or (2) earning power analysis. When looking at a franchise, that is, a business enjoying a sustainable competitive advantage (or a moat with lots of piranhas in it) the analysis will focus on the earning power of the business.

In the beginning of the book Mihaljevic describes the stock selection framework as follows.

Figure 1.2o outlines an approach that may be able to handle, at least in principle, the vast array of equity investment opportunities available in the public markets. Although the following framework may not be practicable for most small investors, it does illustrate how we may think about security selection if we adopt the mindset of chief capital allocator.

The stock selection framework begins by asking whether the net assets are available for purchase for less than replacement cost. If this is not the case, we exclude the company from consideration because it might be cheaper to re-create the equity in the private market. If the equity is available for less than replacement cost, then we consider whether it is so cheap that liquidation would yield an incremental return. If this is the case, we may consider liquidating the equity. In the vast majority of cases, an equity will trade far above liquidation value, in which case we turn our attention to earning power.

Once we focus on the earning power of a going concern, the key consideration becomes whether the business will throw off sufficient income to allow us to earn a satisfactory return on investment. Many related considerations enter the picture here, including the relationship between net income and free cash fl ow, the ability of the business to reinvest capital at attractive rates of return, and the nature of management ’s capital allocation policies.

Manual_of_Ideas_Framework

From Zero to One, or Asset to Franchise

Zero to One, written by Peter Thiel, is a book about ”how to build companies that create new things.” The book is based on a course that Thiel held about startups at Stanford in 2012, and ”the primary goal in teaching the class was to help [his] students see beyond the tracks laid down by academic specialties to the broader future that is theirs to create.”

As always, there is no one formula to find. Instead, there are principles.

”The paradox of teaching entrepreneurship is that such a formula necessarily cannot exist; because every innovation is new and unique, no authority can prescribe in concrete terms how to be innovative. Indeed, the single most powerful pattern I have noticed is that successful people find value in unexpected places, and they do this by thinking about business from first principles instead of formulas.”

Zero to One is about a few things to consider in building a business from the start. Although the book focuses on venture capital and startups, it’s worth reading for everyone interested in business analysis and investing. Why? It discusses the difference between a great business, a business with a sustainable competitive advantage (or “monopoly”), and and businesses that doesn’t enjoy any competitive advantage at all and is bound for a hard struggle for any profits available in a highly competitive market (in theory, the cost of capital since economic profits are competed away).

The value of a business today comes from the cash inflows and outflows that can be expected to occur during the remaining life of the asset discounted at an appropriate interest rate. So, when thinking about the value of any business, future cash flows is highly critical, and at the same time highly uncertain.

One section in the book is called Monopoly Characteristics and devoted to a discussion of what characteristics (i.e., competitive advantages) to look for in a business. Thiel starts by asking a central question:

”What does a company with large cash flows far into the future look like? Every monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.”

Further Thiel notes that:

”This isn’t a list of boxes to check as you build your business—there’s no shortcut to monopoly. However, analyzing your business according to these characteristics can help you think about how to make it durable.”

Characteristics of Monopoly to Look For

Thiel asks and discusses a critical question when it comes to businesses and investing: “What does a company with large cash flows far into the future look like?” This is pretty close to the one-million dollar question. But Thiel also provides a discussion of the different characteristics to look for in our analysis of different businesses. According to Thiel “[e]very monopoly is unique, but they usually share some combination of the following characteristics: proprietary technology, network effects, economies of scale, and branding.”

Below each one of the different characteristics is summarized with all of the quotes below taken from the book.

Monopoly Characteristic Nr. 1: Proprietary Technology

Definition: “Proprietary technology is the most substantive advantage a company can have because it makes your product difficult or impossible to replicate.”

Two different ways: (1) invent something completely new, or (2) radically improve an existing solution.

  • Invent something completely new: “Google’s search algorithms, for example, return results better than anyone else’s. Proprietary technologies for extremely short page load times and highly accurate query autocompletion add to the core search product’s robustness and defensibility. It would be very hard for anyone to do to Google what Google did to all the other search engine companies in the early 2000s.”
  • Radically improve on an existing solution: “Or you can radically improve an existing solution: once you’re 10x better, you escape competition. PayPal, for instance, made buying and selling on eBay at least 10 times better. Instead of mailing a check that would take 7 to 10 days to arrive, PayPal let buyers pay as soon as an auction ended. Sellers received their proceeds right away, and unlike with a check, they knew the funds were good. Amazon made its first 10x improvement in a particularly visible way: they offered at least 10 times as many books as any other bookstore. When it launched in 1995, Amazon could claim to be “Earth’s largest bookstore” because, unlike a retail bookstore that might stock 100,000 books, Amazon didn’t need to physically store any inventory—it simply requested the title from its supplier whenever a customer made an order. This quantum improvement was so effective that a very unhappy Barnes & Noble filed a lawsuit three days before Amazon’s IPO, claiming that Amazon was unfairly calling itself a “bookstore” when really it was a “book broker.”You can also make a 10x improvement through superior integrated design. Before 2010, tablet computing was so poor that for all practical purposes the market didn’t even exist. “Microsoft Windows XP Tablet PC Edition” products first shipped in 2002, and Nokia released its own “Internet Tablet” in 2005, but they were a pain to use. Then Apple released the iPad. Design improvements are hard to measure, but it seems clear that Apple improved on anything that had come before by at least an order of magnitude: tablets went from unusable to useful.”

Examples: Google, PayPal, and Amazon.

Rule of thumb: Must be “at least 10 times better than its closest substitute in some important dimension to lead to a real monopolistic advantage.”

Monopoly Characteristic Nr. 2: Network Effects

Definition: ”Network effects make a product more useful as more people use it.”

Examples: “For example, if all your friends are on Facebook, it makes sense for you to join Facebook, too. Unilaterally choosing a different social network would only make you an eccentric.”

Rule of thumb: “Network effects can be powerful, but you’ll never reap them unless your product is valuable to its very first users when the network is necessarily small. … Paradoxically, then, network effects businesses must start with especially small markets. Facebook started with just Harvard students—Mark Zuckerberg’s first product was designed to get all his classmates signed up, not to attract all people of Earth. This is why successful network businesses rarely get started by MBA types: the initial markets are so small that they often don’t even appear to be business opportunities at all.”

Monopoly Characteristic Nr. 3: Economies of Scale

Definition: ”A monopoly business gets stronger as it gets bigger: the fixed costs of creating a product (engineering, management, office space) can be spread out over ever greater quantities of sales. Software startups can enjoy especially dramatic economies of scale because the marginal cost of producing another copy of the product is close to zero.”

Rule of thumb: ”Many businesses gain only limited advantages as they grow to large scale. Service businesses especially are difficult to make monopolies. If you own a yoga studio, for example, you’ll only be able to serve a certain number of customers. You can hire more instructors and expand to more locations, but your margins will remain fairly low and you’ll never reach a point where a core group of talented people can provide something of value to millions of separate clients, as software engineers are able to do.”

Examples: ”A good startup should have the potential for great scale built into its first design. Twitter already has more than 250 million users today. It doesn’t need to add too many customized features in order to acquire more, and there’s no inherent reason why it should ever stop growing.”

Monopoly Characteristic Nr. 4: Branding

Definition: ”A company has a monopoly on its own brand by definition, so creating a strong brand is a powerful way to claim a monopoly.”

Rule of thumb: ”Beginning with brand rather than substance is dangerous.”

Examples: ”Today’s strongest tech brand is Apple: the attractive looks and carefully chosen materials of products like the iPhone and MacBook, the Apple Stores’ sleek minimalist design and close control over the consumer experience, the omnipresent advertising campaigns, the price positioning as a maker of premium goods, and the lingering nimbus of Steve Jobs’s personal charisma all contribute to a perception that Apple offers products so good as to constitute a category of their own.”

Competitive Advantages Framework

I have written about the subject of competitive advantages earlier, and put together the “Competitive Advantages Framework” as a way to keep the most important parts in one and the same place. As we noted earlier, there is no single formula, instead there are principles to guide us in our analysis and understanding.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company or individual mentioned in this article. I have no positions in any stocks mentioned.

Seth Klarman Defines What Constitutes a Good Business

What constitutes a good business?

Let’s turn to Seth Klarman for some advice.

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In other words, a good business is one that enjoys the following characteristics:

  • Strong barriers to entry
  • Limited capital requirements
  • Reliable customers
  • Low risk of technological obsolescence
  • Abundant growth possibilities
  • Significant and growing free cash flow

Keep these six characteristics in mind as a mini-checklist when thinking about and analyzing a certain business, trying to decide if the business in question meets these requirements for what constitutes a good business.

Walmart’s Return on Invested Capital in 1972-2014

Historical Return on Invested Capital

It’s been some time since I posted about Walmart and its business during the first half of the 1970’s, a period where Walmart enjoyed really high growth and high return on invested capital, measured as operating profit divided by average invested capital (see below for calculation of invested capital). But as expansion kept going and the company grew bigger, return on invested capital headed in the opposite direction, peaking at a record high of almost 55% in 1972 and from there on decreasing to 22% in 1997. From 1998 to 2014 return on invested capital has averaged approximately 28%, peaking at 32% in 2001 and and reaching a low of 26% in 2014.

So what we can see here is that growth clearly comes at a price, even for such a great business as Walmart. The question then is, why did Walmart’s return on invested capital deteriorate?

The straight answer to that question is that Walmart did not enjoy as strong a competitive advantage as it had in the beginning of the 70’s. Greenwald explains Walmart’s shrinking return as it grew bigger in the following way in the book Competition Demystified.

“The only explanation we find convincing to account for the shrinking return is that, as it expanded across the country and overseas, it was unable to replicate the most significant competitive advantage it enjoyed in these early years: local economies of scale combined with enough customer loyalty to make it difficult for competitors to cut into this base.”

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Components of Return on Invested Capital

Return on invested capital is determined by two components, the operating profit margin of a business and its invested capital turnover.

Looking at these metrics we can see that both of them has trended downward during the period 1972 to 2014. Walmart enjoyed its highest invested capital turnover in the 70’s. The operating profit margin held up pretty good until the middle of the 80’s, peaking at 8.5% in 1985. From there on it deteriorated to 5.4% in 1997. The operating profit margin has averaged about 5.8% in the following years up until today.

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All calculations done from data in annual reports provided by Walmart. Annual reports can be found here.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is informational and is in my own personal opinion. Always do your own due diligence and contact a financial professional before executing any trades or investments.

Mental Model: Economic Moat

Moat1“The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” ― Warren Buffett

All quotes below taken from the report Measuring the Moat – Assessing the Magnitude and Sustainability of Value Creation written by Michael J. Mauboussin and Dan Callahan at Credit Suisse.

The report referred to above is a great read about how to think about competitive advantages and how to analyze industries and companies in the search for a so-called moat.

Warren Buffett on Economic Moats

  • “What we refer to as a “moat” is what other people might call competitive advantage . . . It’s something that differentiates the company from its nearest competitors – either in service or low cost or taste or some other perceived virtue that the product possesses in the mind of the consumer versus the next best alternative . . . There are various kinds of moats. All economic moats are either widening or narrowing – even though you can’t see it.” Outstanding Investor Digest, June 30, 1993
    xxx
  • “Look for the durability of the franchise. The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” ― Linda Grant, “Striking Out at Wall Street,” U.S. News & World Report, June 12, 1994
    xxx
  • “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” ― Warren Buffett and Carol Loomis, “Mr. Buffett on the Stock Market,” Fortune, November 22, 1999
    xxx
  • “We think of every business as an economic castle. And castles are subject to marauders. And in capitalism, with any castle . . . you have to expect . . . that millions of people out there . . . are thinking about ways to take your castle away. Then the question is, “What kind of moat do you have around that castle that protects it?” ― Outstanding Investor Digest, December 18, 2000
    xxx
  • “When our long-term competitive position improves . . . we describe the phenomenon as “widening the moat.” And doing that is essential if we are to have the kind of business we want a decade or two from now. We always, of course, hope to earn more money in the short-term. But when short-term and longterm conflict, widening the moat must take precedence.” ― Berkshire Hathaway Letter to Shareholders, 2005
    xxx
  • “A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns . . . Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all . . . Additionally, this criterion eliminates the business whose success depends on having a great manager.”  Berkshire Hathaway Letter to Shareholders, 2007

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