Saturday, October 4, 2008

The New Buffettology: Chp 4: How Companies Make Investors Rich

Two basic ways that companies can make money are through profit margins and inventory turnover. Buffett wants to buy businesses that have high profit margins and high inventory turnover since these types of companies have very favorable business economics. Owning businesses that have either high profit margins or high inventory turnover is also acceptable. Buffett is not interested in owning companies with low profit margins and low inventory turnover since those are the types of companies that have the most difficulty surviving economic downturns and other problem scenarios.

A company which sells the same products as many other companies is operating in a price-competitive business. If there is demand for a product which is only sold by one company, then that company has a competitive advantage through its consumer monopoly. Many brand name companies have competitive advantages provided through their unique products and services.

The reason Buffett is interested in buying companies possessing durable long-term competitive advantages is that those companies are free to set prices to produce higher profit margins and/or higher inventory turnover.

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