Learn to invest with Buffett

Chapter 41

Chapter 6, Section 5, Stock Picking Skill Five: There must be a moat to protect the considerable return on investment
When examining whether a company is worth investing in, we focus on whether the company has a competitive advantage and whether this advantage is sustainable.I think only companies with sustainable competitive advantages in products and services can bring substantial returns to investors.How much influence the company's industry has on society and how much the entire industry will grow are not what we value very much.After all, what we invest in is only a specific listed company, not the entire industry.

--Warren Buffett
Buffett attaches great importance to whether a company has a sustainable competitive advantage.He likens this sustained competitive advantage to a moat protecting a company's economic castle.Buffett believes that an excellent company usually has an economic moat.Only in this way can enterprises guarantee a high level of profitability and bring substantial returns to investors.

Buffett really likes businesses with economic moats.Buffett once said: "We like to have such a castle: there is a wide moat, which can firmly guard our castle. Even if there are countless competitors who want to seize our market, the moat can also prevent outsiders from invading. We want To ensure that the economic moat cannot be crossed by competitors, we must strive to widen our moat every year, even if we sacrifice the profits of the year, we must make our moat wider and wider.”

Buffett believes that if a company depends on a superstar to create operating performance, then it is not a great company and it does not have an economic moat.Just as a hospital mainly depends on a doctor with excellent medical skills to obtain income and reputation, once the doctor is poached by a competitor, the hospital immediately loses the capital to make profits.In Buffett's mind, a company's moat should achieve such an effect: it can obtain high profits when the entire industry is booming, and can still obtain rich returns when the entire industry is in a downturn.

The Coca-Cola Company is an example of a company with a solid economic moat.The world's largest department store, Wal-Mart, conducts experiments in consumer markets in the United States and the United Kingdom, allowing consumers to taste Coca-Cola and Sam'schoice (Wal-Mart's own Coke brand) without looking at the brand. Consumers can't tell which one is Coca-Cola at all. , which is Sam'schoice.So Wal-Mart department stores began offering their own brand of Coke, lined up with Coca-Cola vending machines at half the price.But customers still choose to pay more for Coca-Cola instead of Sam's choice.This is Coca-Cola's moat.Although there are many competitions of cola products in the market, for most customers, as long as cola is mentioned, the old brand Coca-Cola is the first thing they think of.

Buffett believes that the moat will change.No castle is impenetrable, all it takes is time.Therefore, if you want to become a great company, you need to continuously widen the company's moat and increase your own defense capabilities, so that you can be safe and sound in the castle.The Coca-Cola brand is deeply rooted in the hearts of the people, but under the watchful eyes of Pepsi, Coca-Cola still has to continuously increase its competitive advantage.

When choosing companies to invest in, investors should try to choose companies with sustainable competitive advantages. Only companies with sustainable competitive advantages can build a wide moat to protect your profits.

Buffett believes that investors must choose companies with solid economic moats.Only such enterprises can bring substantial returns to investors.

So how should investors assess the economic moat of a company?Buffett believes that assessing whether a company has an economic moat mainly examines the following indicators:

1. Stable business operation
By observing the list of the world's top 500 companies, it is found that most of the companies on the list are still selling almost the same products as they were five or even ten years ago.In Buffett's view, the more stable a business is, the easier it is to have an economic moat.Just because these enterprises have stable business operations, they can focus more on improving services, product lines, production techniques, and so on.In this way, they can provide better products and services than those who entered the industry later.They also have the opportunity to have more loyal customers.On the contrary, if the products or business operated by a company change frequently, it may cause major changes due to poor decision-making.And every time a new business is run, the company needs to find new customers again, which is not conducive to the formation of customer loyalty to the brand.

2. Enterprises have sustainable advantages
Buffett believes that companies like Coca-Cola and Gillette have sustainable advantages.Although it is impossible to predict how many Cokes Coca-Cola will produce and how many razors Gillette will produce in the next 10 years, what is certain is that Coca-Cola will still be producing Coke 10 years later, and Gillette will still be producing razors .The brand images of Coca-Cola and Gillette have been deeply rooted in the hearts of customers, and they will continue to occupy a dominant position in the industry.In fact, their dominance is likely to grow even stronger.Because in the past 10 years, these two companies have expanded their already very large market share, and now all signs point to their success in the next 10 years.

3. The company has excellent management
Buffett believes that an excellent company must have an excellent management.The management is like the captain at the helm, leading the big ship of the enterprise to sail in the vast ocean of business.Excellent management always avoids the ship from hitting the rocks, grasps the direction of the enterprise, and is committed to making the sailing of the enterprise smoother and smoother.In Buffett's view, an excellent management must possess rational characteristics and be able to allocate corporate funds reasonably.In addition, good management must be honest with investors, and will not cover up the stains in business performance or their own wrong decisions through accounting cheating and other means.Finally, a good management team must also ensure that they do not follow suit and imitate other peers in the management process, and can have their own opinions.

Investment motto:

Every company's economic moat is different.Investors must carefully examine whether the company's economic moat is strong.If investors do not have a set of their own inspection methods, they may wish to investigate based on the above three principles.Of course, the deeper the moat, the better, and the wider the better.In this way, the investment is safe and worry-free.

(End of this chapter)