“Develop your eccentricities while you are young. That way, when you get old, people won’t think you’re going ga-ga.”
– David Ogilvy
I admire Warren Buffett. Anyone who can assemble the long term financial track record he has, and yet be plain-spoken, humorous, and unassuming in his approach to life is indeed rare. Yet, he is considered an eccentric by many. Unjustifiably so, I say.
I grew interested in Warren Buffett in the 1990’s and studied Berkshire Hathaway’s annual reports. Buffett offers a great many insights – applicable both to investing and to running a business. There are three that I especially like. They form the principles of effective, disciplined business execution.
- Economic moat. What Michael Porter devoted over 500 pages to describing in Competitive Advantage, Buffet captures in the simple two-word phrase he coined and popularized. Simply put, a moat is the sustainable advantage a business has over its competitors. It’s what allows a business to offer a product similar to those offered by its competitors, but which achieves superior profits. With few exceptions, firms with substantial moats (Buffett likes to refer to these as moats teeming with alligators and crocodiles) are themselves exceptional markets. They understand the relationship between their customers and their offering so well that competitors can only mimic the veneer. Apple. Nike. Starbucks. Heinz. Coca-Cola. A great brand is as good as a patent. Sometimes better.
- In it for the Long Haul. Buffett is a value investor. He buys based on the economic prospects of the business, management track record, and price. As he likes to quip, his ideal holding period for a stock is forever. His friend and teacher, Benjamin Graham, taught him the mental attitude toward market fluctuations through the allegory of Mr. Market, a remarkably accommodating fellow. Daily, Mr. Market has a price at which he will buy your interest or sell you his. And, irrespective of the economic stability of the business, Mr. Market’s prices change daily based on the euphoria or fear he feels with market events. Like Buffett, great firms and their management do not blink. They manage to the fundamentals of their business, and take a long term view. They may be disquieted by conditions of change in the short term, but provided the fundamentals of the business are sound they do not become slaves to them.
- Margin of Safety. If there is a single lesson to be learned from Buffett, it is one also taught him by Benjamin Graham. Margin of Safety is the underpinning of value investing – paying a price greater at a discount to the intrinsic value of a business to protect the investor from poor decisions, market downturns, and a future that is not knowable. Well-managed and effective firms understand and apply this principle in their markets as well. They do not make bets in the market; they do execute against measured risk. They do not offer or withdraw products at whim; they execute carefully, methodically and patiently. They preserve the equity of their brands as much as they preserve the capital of their shareholders. It is no accident that Lexus, experiencing a recall of its LS sedan during the first year of introduction to the U.S., delivered loaner LS sedans to owners while the recall repairs were made. It is no fluke that Apple’s market cap has grown 10X since its introduction of mobile “i” devices. It is not a lucky streak that has caused Coca-Cola to hold its decades-long, seemingly impervious #1 market share position.
The very best, enduring businesses take the long term view. Their managements understand the tenets followed by Warren Buffett. Yet, their managements are not imbued with special powers unavailable to others. It’s a matter of understanding the principles of sound execution, and having the discipline to follow them.
As Buffett says, “To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
Leave a Reply