bizzXceleration: Performance, Value and Profit

Parts 1 and 10 have a lot to say about personal values, integrity, doing work that you love and the kind of world we live in. Odd that the world's most successful investor does a pretty good job as a downhome, country-store philosopher, isn't it ? :). The middle parts are particularly interesting for getting Warren's take on understanding and analyzing businesses and making investment decisions. But we'd especially point to Parts 3-5 if you listen to no others.

Now at some point you've probably seen Warren's basic principle's in some business article or heard him on Rose or someplace else. Certainly the AAII article does a superb job of translating those principles into a screening set, within the limits. We'd summarize/paraphrase them roughly as: 1) Understand the business and be absolutely confident in it as a business for the long-haul, 2) view investments as buying a piece of the business and be comfortable not trading them for 10 years, 3) look for companies with sustainable competitive advantages that protect the core value proposition and 4) pick companies with good management. Listening to Warren takes those simple-sounding principles and fleshes them out with examples and discussions that makes them meaningufully operational. Beyond that though we got several surprises that, as long we thought we'd been following Buffett, were eye-openers:

1. Understand the business - everybody's heard the make a decision in 5-10 mins. What's new news to us is that a) he adds develop a circle of competency, say 30+ companies, you really understand and follow and b) it takes a lot of digging and research. It turns out the Warren spent a long...long time and a lot of effort learning how businesses really work, i.e. what their business models are. Since this is our central mantra we were extremely gratified to hear it. 

2. Focus - you don't have that many good ideas, one good one will get you to where you need to go, don't diversify if you're really willing to work at it but instead focus on 6-8 companies, or investment ideas, that your nurse for a long time. If you're just investing in general without the time or interest then diversify, in fact focus on stock index funds. Otherwise if you are looking for above average returns they are the result of work, lots of it, good ideas and focus.

3. Moats - a key strategic principle is for companies to keep growing their moats, that is their abilities to defend their businesses and maintain above average returns. The re-emphasis on this was interesting but what was another major eye-opener were the definitions by example. A moat could be service, cost advantages & price, distribution, patents, etc. All the traditional operating functions that we here think are so important, that are almost entirely ignored by the business & financial press and constitute the sustainble operating advantages of a firm. In other words the Moat. 

4. Breakdowns and Bad Examples - Warren constantly used examples of companies with good businesses and big moats. In passing he mentioned MSFT and technology and why he doesn't invest, the utility/power industry, why he's a member of Airlinoholics Anonymous, P&G, MickeyD's, Gillette and Coke, Coke, Coke and Coke. Now in our books Coke became the perfect counter-example to some of his thinking. They thought they had a never-break business model where all they had to do was sustain in the states and extend it worldwide. In fact after major efforts and a huge bad patch since about '00 they're now recovering.

It turns out that you can indeed put a major business model & moat at risk of destruction. Consider another inadvertent bad example used - Kodak. Coke has dug itself out from under its' own arrogance by re-thinking it's approach to product development and innovation, by realizing that one could indeed saturate the core market and renewing the basic strenghts of its' culture and sanding off, painfully, a lot of the arrogance and learning to adopt and adapt. One could say the same thing for MickeyD's as well.

Now are these exceptions to Warren's model or confirmations ? We'll let you answer that as a take-home quiz but the hint is this. If you pick a good business with a strong culture it's likely to renew itself. :)

Another "little" thing that struck us that hadn't been obvious before but seems clear and simple is how closely Warren's approach, one you get under the covers of the last ten years of press coverage, lines up with the one we outlined earlier: Think Like a Private Equity Guy ? No, Think Like An Owner !

Here's a side by side comparison:

 For a collection of prior posts and readings that pursue these themes try browsing the archive on Enterprise Performance for a collection. Including examples and more tools.