Wednesday, October 8, 2008

The New Buffettology: Chp 6: The Kind of Business Warren Loves

During the .com craze, Warren informed people that the key to investing was focusing on the durability of a competitive advantage of a business. The competitive advantage of a business allows it to earn superior profits and the durability of the advantage allows it to maintain these superior profits into the future. In addition, the business must possess a durable competitive advantage without having to spend great sums of cash to maintain it.

The key is that the actual products and services possess the competitive advantage, not just the company. For Warren, consistent products and services equate to consistent profits. Companies that have a competitive advantage either through its size, its culture or its intellectual talent (e.g. Intel) don't qualify as possessing a durable competitive advantage if they make products or services that have a short life span. The company might be highly successful, but if the competitive advantage is dependent on the its ability to continually create new and innovative products, then it is more susceptible to losing the competitive advantage to new competitors. Alternatively, if the product or service itself has a competitive advantage through e.g brand recognition such as with Hershey's chocolates or H&R Block's tax service, then it is much more likely that it will be a durable competitive advantage.

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