There was an excerpt posted today on the Four Hour Workweek blog from a new 81-page book: A Few Lessons for Investors and Managers from Warren E. Buffett.
I love succinctness, and you can’t get much better than distilling the essence of “what Charlie and I have been saying over the years in annual reports and at annual meetings” into 81 pages.
Here’s one of my favorite sections:
THE REALLY GREAT BUSINESS: High returns, a sustainable competitive advantage and obstacles that make it tough for new companies to enter
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. (2007)
“Moats”—a metaphor for the superiorities they possess that make life difficult for their competitors. (2007)
Moats can widen or shrink
Long-term competitive advantage in a stable industry is what we seek in a business. (2007)
Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. (1996)
The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed. (2007)
One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. (1983)
If a business requires a superstar to produce great results, the business itself cannot be deemed great. A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO. (2007)
Although Mr. Buffett is in the business of big business, the rules that he applies in evaluating the current and future prospects of the companies he invests in are equally applicable to your startup.
You are not going to go from idea to a Really Great Business without many to most of the these same characteristics.