Finding companies with a lasting competitive edge is not easy
acquired Berkshire Hathaway, a textile company based in New England, for his investment partnership. When he began buying the stock, in 1962, Berkshire had working capital worth $16 a share; the shares sold for $8. So Mr Buffett was getting the rest of the firm’s assets for less than nothing. This was the sort of “value investing” that had made Mr Buffett and his partners a tidy pile over the preceding decade.
In its way, Berkshire provided a valuable lesson. Mr Buffett’s strategy shifted. Instead of “buying fair companies at wonderful prices”, he would buy “wonderful companies at fair prices”. To make the grade, a firm must have a lucrative position in the marketplace. But it needs more. To be a truly great investment, the company should also have a “moat”.
Looking back, Mr Buffett has invested in firms with two sorts of moat. The first type operates in a market that has room for just one profitable firm. In the 1970s Mr Buffett’s monopoly of choice was citywide newspapers, which had a lock on advertising., America’s largest freight railway, which Berkshire has owned outright since 2009, is a more recent example. The moat’s contours are not as clear for the second type. The firm has competitors.
With hindsight, Coke, Gillette and the rest look like sure-fire winners. That Berkshire made losing bets on firms with apparently unbreachable moats shows the difficulty of foresight. An example was Tesco, a British grocery chain. It was the leading firm in an oligopoly—a classic Buffett play. But after it issued several profit warnings, Berkshire sold at a hefty loss in 2014. Other moats are springing leaks.
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