Durable Competitive Advantage: One Characteristic Buffett’s Holdings All Have in Common
Warren Buffett’s Berkshire Hathaway holdings (both subsidiaries and stocks) are all very different types of businesses. Consider these different industries which Berkshire has holdings in:
- Insurance
- Manufactured Homes
- Jewelry
- Fast Food
- Aviation
- Chemical
- Underwear
- Journalism
- TV Networks
- Furniture
- Banking
- Kitchenware
- Railroad
This list, of course, is only touching the surface.
Point being, Berkshire owns businesses in many different industries.
How, then, does Buffett still claim to stay within his “circle of competence”?
There must be some common factor among his holdings. As successful as Buffett has been during his investing career, the common factor should be regarded with great reverence. So what is it?
Many of you, I’m sure, have already guessed it. There is nothing complicated here. The answer is so simple that it almost seems like a waste of time. But perhaps there is power in simplicity.
This time, take a look at a list of actual businesses in Berkshire’s portfolio (subsidiaries and stock). The list is made up of many of Berkshire’s largest holdings:
- GEICO Auto Insurance
- Coca-Cola
- IBM
- American Express Co
- Burlington Northern Santa Fe Railroad
- Wells Fargo & Co
- Wal-Mart
- Procter & Gamble
- ConocoPhillips
- Dairy Queen
- Nebraska Furniture Mart
While I am sure it is possible to argue that there is more than one common characteristic between these businesses, the one screaming similarity is that they all have some sort of durable competitive advantage. None of these businesses would easily lose its competitive advantage overnight. Warren Buffett has clearly explained that he only invests in companies with an economic moat (his term for durable competitive advantage).
Recently, as Warren Buffett was justifying his $10 billion purchase of IBM stock, he used another word in place of economic moat. He explained that IBM has “continuity”. A close look at the definition shows a great resemblance to “economic moat” or at least it portrays the reason an economic moat is so necessary.
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continuity: the unbroken and consistent existence or operation of something over a period of time
So for those of us Value Investors that are trying to emulate Warren Buffett, perhaps the most important question we could ask ourselves when considering our next purchase of a stock is
- Do the economics and competitive landscape of this investment allow for continuity?
- Does this business possess a wide and deep economic moat?
Answering this question, of course, is not easy. Two of the most common approaches include:
1. Looking for businesses that have higher gross margins than their competitors
2. Taking a good look at the business’ revenue stream, looking for (1) continuing demand, and (2) a promise of continuity. The best way to do this is to break down a business revenue stream by major products or services. Then you can get a better idea of where the revenue is coming from, how much demand there really is, and how sustainable it is.
Sometimes, however, just sitting back and thinking after you have done your research on the company might be your best option on deciding whether you think the competitive advantage is sustainable or not.
Warren Buffett and Charlie Munger have often said they spend much of their time simply thinking and reading. If the economic moat isn’t obvious, perhaps there is a good chance it doesn’t have an economic moat at all. That is at least the feeling I get when I look over Warren Buffett’s holdings.
About the author: Daniel Sparks is an MBA student at Colorado State University. He has a passion for value investing and runs a value investing blog at ValueFolio. He can be reached at [email protected]
