The Warren Buffett Way
According to Buffett, the economic world is divided into a small group of franchises and a much larger group of commodity businesses, most of which are not worth purchasing. He defines a franchise as a company whose product or service (1) is needed or desired, (2) has no close substitute, and (3) is not regulated. Individually and collectively, these create what Buffett calls a moat— something that gives the company a clear advantage over others and protects it against incursions from the competition. The bigger the moat, the more sustainable, the better he likes it. “The key to investing,” he says,“is determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”14 (To see what a moat looks like, read the story of Larson-Juhl in Chapter 8.)
The intelligent investor key points
Chapter 14
- Current Assets / Current Liabilities = 2:1
- Past 10 years of +ve earning
- Divident record past 20 years of uninterrupted dividend payout
- Earning Growth - Past 10 years with minimum increase of 33% pershare earnings in using 3 year averages at the beginning and end
- Moderate PE - Past 3 years - no more than 15x