Thursday, August 20, 2009

Value Investing in Advantaged Businesses

Then the key becomes understanding what it takes to qualify as an advantaged business and what are the characteristics that we are looking for. As we go through that broad universe of some 3,000 companies in order to narrow down our investable universe, we’re focused on businesses that have high operating margins, high returns on equity and high returns on invested capital. We’re focused on businesses that have a competitive advantage; Buffett calls it a moat and castle. Once I was with Buffett and I said to him, “There is this professor at Harvard who wrote a book about competitive framework and he maintains that a company’s ability to control the future is to a large extent determined by its position relative to customers, suppliers, competitors and substitute products. It seems to me that this is essentially the same thing that you, Mr. Buffett, talk about when you use the analogy of a moat and castle.” He chuckled and said, “Well, Professor Porter writes books about it, and I make billions, but they are the same concepts.”

Full PDF