Sunday, December 18, 2005

Favorite companies

The only thing we favor is industries we can understand. And then, we like businesses with what I call "moats" around them. We like businesses that are protected in some way from competition. If you go in the drugstore and say "I want to buy a Hershey bar" and the guy says "I've got an unmarked chocolate bar that's a nickel cheaper," you'll buy the Hershey bar or you'll go across the street.

One of the interesting things to do is walk through a supermarket sometime and think about who's got pricing power, and who's got a franchise, and who doesn't. If you go buy Oreo cookies, and I'm going to take home Oreo cookies or something that looks like Oreo cookies for the kids, or your spouse, or whomever, you'll buy the Oreo cookies. If the other is three cents a package cheaper, you'll still buy the Oreo cookies. You'll buy Jello instead of some other. You'll buy Kool Aid instead of Wyler's powdered soft drink. But, if you go to buy milk, it doesn't make any difference whether its Borden's, or Sealtest, or whatever. And you will not pay a premium to buy one milk over another. You will not pay a premium to buy one [brand of] frozen peas over another, probably. It's the difference between having a wonderful business and not a wonderful business. The milk business is not a good business.

......

We like to be in businesses I can understand. There are all kinds of businesses I don't understand, but we're not going to own them. Thomas Watson Sr., of IBM, in that book "Father, Son, and Company, that his son wrote, quoted his father as saying "I'm no genius, but I'm smart in spots, and I stay around those spots." The real trick is knowing what you know, and what you don't know. It isn't how much you know, it's whether you can define it well, so you know when you can take a swing at the ball, and you know when you've got no business swinging.


Excerpt from "Three Lectures by Warren Buffett to Notre Dame Faculty, MBA Students and Undergraduate Students"

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