Thank You to all the research volunteers.

Moats : The Competitive Advantages of Buffett and Munger Businesses


studies 70 profitable Berkshire Hathaway businesses.

click here



http://www.frips.com/70.jpg



A must read for Investors, Managers, and Students of Business !


Moats : The Competitive Advantages of 70 Buffett & Munger Businesses



The economic moats of 70 profitable Berkshire Hathaway businesses.





This book is now available.

During the writing phase, this offer was made: Any student or individual (of any age) willing to help answer 2 questions about 2 businesses will receive a mention in their respective chapter contribution like this: "Research Assisted by Jane Doe, Purdue University" or "Research Assisted by John Doe, UNO - College of Business"or "Research Assisted by Josh Doe, Chicago"

Answer 2 Questions about 1-2 companies: 1 paragraph per question
(1.) Name the business' competitive advantages and (2.) Are the advantages sustainable for the next 10 years? Cost Advantages and/or Differentiation(Brand)Advantages? The insightful volunteer will explain his or her position in defending the answer to question #2.
Think about/imagine the MOAT from the competitor/attacker's point of view.

Email Bud Labitan at budlabitan@aol.com   I reserved the right to edit each chapter. My other books are listed here: http://www.amazon.com/Bud-Labitan/e/B002D1ERT4
 
 

Bud Labitan

and

 

From L to R... Front Row: Dr. Phani Tej Adidam, Adam Stuudts, Adam Ward, Natalja Callahan, Erin Sestak, Jennifer Iwanski, Andrea Tagart
Rear Row: Tariq Khan, Kevin Walsh, Sebastian Jung, Ryan Shuck, Raghu Dasari, Florian Beil

 

From L to R... Front Row: Dr. Phani Tej Adidam, Adam Stuudts, Adam Ward, Natalja Callahan, Erin Sestak, Jennifer Iwanski, Andrea Tagart
Rear Row: Tariq Khan, Kevin Walsh, Sebastian Jung, Ryan Shuck, Raghu Dasari, Florian Beil

 

Beryl Chavez Li, University of Manchester, UK. and Scott Thompson, MBA, and Jubin Jacob




Richard Konrad, CFA, Value Architects Asset Management, Dr. Maulik P. Suthar and Todd Sullivan of Valueplays.net






Stephen Chan of The University of Manchester, UK., Daniel Rudewicz, CFA, Furlong Financial, LLC and Tim Bishop, Book Editors




Saran B. Kumar, Theodor Tonca, Shouryamoy Das, Book Editors





Brian Bernardino, JD, Peter Stein, Hoang Quoc Anh, Book Editors





List of 70 Businesses covered in the book.



Acme Brick Company, Bud Labitan with Adam Ward, UNO-CBA.  
American Express Co. (AXP), Dr. Maulik Suthar, Gujarat, India.  
Applied Underwriters, Bud Labitan with Adam Ward, UNO-CBA.  
Ben Bridge Jeweler, Bud Labitan with Beryl Chavez Li, University of Manchester, UK.  
Benjamin Moore & Co., Bud Labitan with Mr. Jack Wang CPA, Lexico Advisory.  
Berkshire Hathaway Group, Bud Labitan with Brian Greising, MainStreet Advisors and and Rick Mayhew
Berkshire Hathaway Homestate Companies, Bud Labitan with Beryl Chavez Li, University of Manchester, UK.   
BoatU.S., Bud Labitan with Peter Chen, Singapore.   
Borsheims Fine Jewelry, Bud Labitan with Tariq Khan, UNO-CBA.  
Buffalo News, Bud Labitan and Peter Stein 
Burlington Northern Santa Fe Corp. Bud Labitan with David Leoy.  
Business Wire, Bud Labitan with Larry Harmych.  
BYD, Bud Labitan with Kevin Walsh, UNO-CBA.  
Central States Indemnity Company, Bud Labitan with Azalia Khousnoutdinova, UNO-CBA,  
Clayton Homes, Bud Labitan with Erin Sestak, UNO-CBA.  
Coca Cola (KO) Bud Labitan with Sebastian Jung, UNO-CBA,  
ConocoPhillips (COP), Bud Labitan with Adam D. Studts, PE, UNO-CBA.  
CORT Business Services, Bud Labitan with Erin Sestak, UNO-CBA.  
Costco Wholesale (COST), Bud Labitan with Jubin Jacob, AUC-SOM.  
CTB Inc., Bud Labitan with Todd Sullivan.  
Fechheimer Brothers Company, Bud Labitan with Ben Albaitis.   
FlightSafety, Bud Labitan with Peter Stein  
Forest River, Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.  
Fruit of the Loom®, Dr. Maulik Suthar, Gujarat, India.  
Garan Incorporated, Bud Labitan with Dr. Edwin Fuentes 
Gateway Underwriters Agency, assigned Daniel Rudewicz, CFA of Furlong Financial, LLC.  
GEICO Auto Insurance Bud Labitan with Florian Beil, UNO-CBA,  
General Re, Bud Labitan with Raghu Dasari, UNO-CBA, and Theodor Tonca
H.H. Brown Shoe Group, Bud Labitan with Mervyn H. Teo (Singapore).  
Helzberg Diamonds, Bud Labitan with Natalja Callahan, UNO-CBA.  
HomeServices of America, Bud Labitan with Sebastian Jung, UNO-CBA,  
IBM, Bud Labitan with Tim Bishop and Peter Stein
International Dairy Queen, Inc., Bud Labitan with Tariq Khan, UNO-CBA.  
Iscar Metalworking Companies, Bud Labitan with Kevin Walsh, UNO-CBA.  
Johns Manville, Bud Labitan with Manpreet Singh Saran.  
Johnson & Johnson (JNJ), Beryl Chavez Li  
Jordan's Furniture, Bud Labitan with Zehao Sun.  
Justin Brands, Dr. Maulik Suthar, Gujarat, India.  
Kraft Foods (KFT), Bud Labitan with Andrea Tagart, UNO-CBA.  
Larson-Juhl, Bud Labitan with Tim Bishop 
Lubrizol, Bud Labitan with Scott Thompson, MBA.
M&T Bank Corp (MTB), Bud Labitan with Cliff Orr, Kellogg-Northwestern University and Richard Konrad, CFA, Value Architects Asset Management
Marmon Holdings, Inc., Bud Labitan with David Lau and Theodor Tonca  
McLane Company, Dr. Maulik Suthar, Gujarat, India.  
Medical Protective, Bud Labitan with Michael Murillo, KCUMB 
MidAmerican Energy Holdings Company, Bud Labitan with Dr. Maulik Suthar, Gujarat, India and Brian Bernardino, JD 
MiTek Inc. Bud Labitan with Mr. Jack Wang CPA, Lexico Advisory.  
Moody's (MCO), Bud Labitan with Raghu Dasari, UNO-CBA.  
National Indemnity Company, Bud Labitan with Jen Iwanski, UNO-CBA and Rick Mayhew 
Nebraska Furniture Mart, Bud Labitan with Julie Rosenbaugh, UNO-CBA, Theodor Tonca, and Shouryamoy Das  
NetJets®, Bud Labitan with Christian Labitan.  
PacifiCorp., Bud Labitan with Beryl Chavez Li, University of Manchester, UK. 
Precision Steel Warehouse, Inc., Bud Labitan with Adam D. Studts, PE, UNO-CBA and J.T. Loudermilk, MBA  
Procter & Gamble (PG), Bud Labitan with Beryl Chavez Li, University of Manchester, UK  
RC Willey Home Furnishings, Bud Labitan with Azalia Khousnoutdinova, UNO-CBA.  
Richline Group, Daniel Doyon, Purdue University.  
Scott Fetzer Companies, Cliff Orr, Kellogg-Northwestern and Hoang Quoc Anh, Vietnam  
See's Candies, Bud Labitan with Jen Iwanski, UNO-CBA.  
Shaw Industries, Bud Labitan with Daniel Doyon and Richard Konrad, CFA, Value Architects Asset Management 
Star Furniture, Bud Labitan with Pamela A. Quintero, MBA.  
The Pampered Chef® Bud Labitan with Julie Rosenbaugh, UNO-CBA.  
TTI, Inc., Bud Labitan with Peter Chen, Singapore.  
United States Liability Insurance Group, Bud Labitan with Stephen Chan, University of Manchester and Colin Farrier
US Bancorp (USB), Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.  
USG Corp (USG), Bud Labitan with Richard Konrad, CFA, Value Architects Asset Management.  
Wal-Mart (WMT) with Florian Beil, UNO-CBA.  
Washington Post (WPO), Bud Labitan with Andrea Tagart, UNO-CBA and Richard Konrad, CFA, Value Architects Asset Management
Wells Fargo (WFC), Bud Labitan with Natalja Callahan, UNO-CBA.  
Wesco Financial Corporation, Bud Labitan with Stephen Chan, University of Manchester, UK.   
XTRA Corporation, Bud Labitan  








Here is a good example of a submission:

 

Burlington Northern Santa Fe (“Burlington”)

pre-edited submission by

David Leoy, Business Analyst, Singapore



(1.) Name the business' competitive advantages

Having a strong moat to keep competitors at bay has been a consistent pre-condition in Buffett’s past investments.The impregnable franchise of Burlington is very apparent. Founded in 1961, Burlington currently owns over 32,000 miles of track in the United States. It also holds over 6,700 locomotives and 85,000 freight cars. This presents a formidable barrier to entry because any competitor would have to fork out multi billions in capital expenditure to replicate Burlington’s existing set up. There is also heavy ongoing maintenance capex, estimated to be US$2.6 billion annually. Due to the moat around Burlington's business, it has been remarked that the company could be poorly run, but each time the ocean freight rate differential forced export grain to the Pacific Northwest ports, Burlington could not help but profit from the shift. This is in line with Buffett's remarks which often extorted investors to "invest in a business that even a fool can run".

Buffett’s purchase is also perhaps a bet that, with the burgeoning deficit, the US government will not be spending enough to repair and expand the country's infrastructure.This could then lead to greater highway congestion and consequently force traffic onto railroads. Already the largest inter-modal freight hauler in the sector, Burlington is well positioned to further benefit from the shift of freight from an all highway movement to inter-modal. In the latter system, truckers do the pick up and delivery in the last mile while trailers and containers travel long haul by rail.

 


 (2.) Are they sustainable for the next 10 years

Despite its debt woes, Buffett has reiterated his optimism for America’s future. Burlington represents his bet on the economic future of America because it is the workhorse serving more of the nation's major grain producing regions than any other railroad. Besides being the largest transporter of beer and wine by rail in the United States, Burlington transports sufficient canned beverages to supply every resident of New York, Chicago and Los Angeles with one beverage a day for nearly one year. It also hauls many industrial goods such as lumber, iron and steel across America. Hence, as long as America thrives and consumes, Burlington will continue to do well.

In a likely era of heightened inflation and elevated oil prices, railroads are preferred over long-haul trucking. Looking ahead, fuel prices are likely to remain high due to scarcity of supply and higher extraction costs, maintaining rail’s cost edge. This would also in turn compel America into using and transporting more coal. Currently, more than 10 per cent of the electricity produced in the country, enough to power one out of every ten homes, is already being generated from coal hauled by Burlington. Furthermore, as the world becomes more environmentally conscious, regulatory policies are increasingly more favourable for the railroad sector. Rail is the most environmentally friendly form of surface transportation. A government study had revealed that railroads are up to 5.5 times more fuel efficient than trucks in carrying goods. Hence, regulators are expected to be focused on reducing commercial truck traffic and channelling them onto rail. This is because the latter generates a quarter as much in greenhouse gases.











Sample Chapter, After Final Editing:





Burlington Northern Santa Fe Corp. competitive advantage

Bud Labitan with David Leoy, Business Analyst, Singapore

 

The highlight of 2010 was acquisition of BNSF. Said Buffett, “It now appears that owning this railroad will increase Berkshire’s “normal” earning power by nearly 40% pre-tax and by well over 30% after-tax.  Making this purchase increased our share count by 6% and used $22 billion of cash. Since we’ve quickly replenished the cash, the economics of this transaction have turned out very well.”

Charlie Munger, Vice Chairman of Berkshire Hathaway, commented, “we used to not like them (railroads) because they needed large amounts of capital, had tough unions, and stiff competition from the trucking business. The paradigm had shifted. Now the railroad industry has a competitive advantage in energy use efficiency and double-stacking freight.”

Railroads now have major cost and environmental advantages over their main competitor, trucking. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That is three times more fuel-efficient than trucking.  Our country gains because of reduced greenhouse emissions and a smaller need for imported oil. Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required.

Railroads profit from longer hauls. They have sold or leased short runs to independent short-line railroads, which pay a percentage of the haul to the major railroads. So, the major railroads have eliminated the less profitable short-line business. The Staggers Act in 1980 deregulated railroads and allowed them to set rates to compete with trucking. Railroad managements negotiated with the unions, resulting in standard trains having two rather than five people on board. And, railroad maintenance costs have been lowered by automation and mechanization.  

Low-sulfur coal mined in Powder River, Wyoming is transported to to electric plants around the country. Wyoming coal is also shipped to Birmingham, Alabama three times a week in 132 coal gondola cars. This train has three big engines on the front and two pushing engines in the back. After unloading in Birmingham, and without turning the unit around, the two rear engines lead the train back to Powder River.

Charlie Munger admitted: “We did finally change our minds and invested. We finally realized that railroads now have a huge competitive advantage, with double-stacked railcars, guided by computers, moving more and more production from China, etc. They have a big advantage over truckers.”

Burlington currently owns over 32,000 miles of track in the United States. It also holds over 6,700 locomotives and 85,000 freight cars. This is a formidable barrier to entry because any competitor would have to spend multi billions in capital expenditure to replicate the BNSF system. There is also heavy ongoing maintenance capital expenditures, estimated to be US$2.6 billion annually.

Due to the moat around Burlington's business, it has been said that the company could be poorly run, but each time the ocean freight rate differential forces export grain to the Pacific Northwest ports, Burlington can profit from the shift.

The US government may not spend enough to repair and expand the country's infrastructure. This could then lead to greater highway congestion and force traffic onto railroads. Already the largest inter-modal freight hauler in the sector, Burlington is well positioned to further benefit from the shift of freight from highway movement to inter-modal. In the latter system, truckers do the pick up and delivery in the last mile while trailers and containers travel long haul by rail.

Are the competitive advantages sustainable for the next 10 years? Despite its debt, Buffett has reiterated his optimism for America’s future. Burlington represents his “All in wager” on the economic future of America because it is the workhorse serving more of the nation's major grain producing regions than any other railroad. Besides being the largest transporter of beer and wine by rail in the United States, Burlington transports many industrial goods such as lumber, iron and steel across America. Hence, as long as America thrives and consumes, Burlington will continue to do well.

In a likely era of heightened inflation and elevated oil prices, railroads are preferred over long-haul trucking. Looking ahead, fuel prices are likely to remain high due to scarcity of supply and higher extraction costs. This maintains rail’s cost edge. This could also compel America into using and transporting more coal. Currently, more than 10 per cent of the electricity produced in the country, enough to power one out of every ten homes, is being generated from coal hauled by Burlington. Furthermore, as the world becomes more environmentally conscious, regulatory policies are tilting more favourably towards the railroad sector. Rail is a more environmentally efficient form of surface transportation. Rail generates only a quarter as much in greenhouse gases. Since a government study revealed that railroads are much more fuel efficient than trucks in carrying goods,  regulators are expected to focus on reducing commercial truck traffic and channelling them onto rail.  

The increasing consumption of bio-fuels such as ethanol will benefit railways too. Ethanol fuel production in the US has been growing over 30 per cent in recent years. Production hit 13 billion gallons in end 2010. Production capacity and demand for ethanol is likely to further increase with the push towards the use of cleaner energy. Given that ethanol cannot be transported in pipelines, rails will shoulder a substantial portion of the load. The BNSF system has three transcontinental routes.  And, BNSF has the best route from Long Beach, California, to Chicago, Illinois.






Introduction

 

Charlie Munger said, “Let’s go for the wonderful business.” So, after years of buying “bargain-purchase" follies, Warren Buffett and Charlie Munger  realized that it is much better to buy a wonderful company at a fair price than a fair company at a wonderful price. Now, when buying companies or common stocks, they look for first-class businesses accompanied by first-class managements.

What makes a first-class business wonderful? It must have one or more economic moats.

One of the oldest moats surrounded the ancient Egyptian settlement of Buhen, on the West bank of the Nile River. During the medieval period, the kings of Europe would build wide and deep trenches filled with water around their castles. These moats were built as single or double protective barriers against invading armies. In business, we think of economic barriers that can both defend and injure the invading competition. Munger observed that capitalism is a pretty brutal place. Yet, some good businesses can survive a little bad management. Warren Buffett said “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.”

Moats is designed as a learning resource for investors, students, and managers of business. This book is about the competitive advantages of businesses that Warren Buffett and Charlie Munger bought for Berkshire Hathaway. (NYSE: BRK.A, BRK.B). Most of these businesses are wholly owned subsidiaries. A handful of them are partially owned through stock (equity) investments. Imagine these competitive advantages as protective moats around each economic castle. Will these economic moats endure over time? Over time, each customer makes up a part of that answer. Charlie Munger stated it this way: “How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.” 

The information within this book comes from multiple online sources listed in the Appendix. The most important sources come from each business’ publications and the annual letters of Warren Buffett to the shareholders of Berkshire Hathaway. Other pieces of information were found by the many volunteers and students listed in the Appendix.

The research volunteers and contributors to this book were asked two basic questions. First, what are the competitive advantages of the business you are looking at? Secondly, are these advantages sustainable for the next ten years?

When I posted this offer out on the web, I was pleased to welcome many enthusiastic and knowledgeable volunteers. While much of my research was already compiled, I needed to test my ideas against someone else. So, I thank each and every one of the contributors listed at the Moats website here: http://www.frips.com/book.htm

I extend a special thanks to Professor Phani Tej Adidam, Ph.D. who is the Executive Education Professor of Business Administration, and Chair, Department of Marketing and Management, and Director, CBA International Initiatives at University of Nebraska at Omaha. Professor Adidam’s MBA students of 2011 have contributed valuable ideas to many of these chapters.

Thank you Richard Konrad, CFA, of Value Architects Asset Management. Rick has been an insightful contributor to several chapters. Thank you Dr. Maulik Suthar of Gujarat, India. Maulik has been a thoughtful contributor to several chapters, and an enthusiastic supporter of this project. Thank you Scott Thompson, MBA for sharing your thoughts, analysis, and feedback.

This book is about the competitive advantages of 70 of the many businesses that Warren Buffett and Charlie Munger bought for Berkshire Hathaway. Why did I focus on 70? I took the names of the businesses listed on business website’s link to subsidiaries, and added a few of their largest stock investments. My intent was to study the economic moats and see which ones are growing and which ones are shrinking.

Having a “Sustainable Competitive Advantage” means customers keep coming back to repurchase. The two major areas of competitive advantage are: 1. a cost advantage, and 2. a differentiation advantage. While the marketing mix teaches us to think about the product, price, place, and promotions, this all comes together in the mind of the potential customer. The customer may or may not perceive these two general areas of advantage. This book refers to them as a “cost” and “special” advantages. I simplify by substituting the word “special” for differentiation.

Over the years, Warren Buffett and Charlie Munger found wonderful businesses by asking a lot of questions. What is the nature of each business? Can we predict it with a high degree of accuracy? Can we imagine a moat around each economic castle? Will this moat be enduring? Is there something special here for our customers, or is this advantage eroding?

Since the nature of capitalism is competition, a successful business needs to have “something special” in order to lead the pack and fend off present and potential competitors. It needs a barrier to entry. Sustainable Competitive Advantage is also called “favorable long-term prospects” or “enduring economic advantages.” It comes from things that make a business difficult to copy or enter. A brand is such a barrier because it represents something unique and valued in the mind of a customer that promotes customer loyalty. A valuable patent or trademark can also give a business a period of protected advantage, acting as a barrier to entry.

Warren Buffett and Charlie Munger added to Ben Graham's foundation of bargain hunting by looking for a business with a big protective moat around it. Buffett and Munger look for something special in peoples’ minds such as: Lower Cost of Production, Brands, Economies of Scale, Patented Technology, Location, Distribution System, Specialized Services, Network, Regional Monopolies and Intangible Assets that create higher switching costs and a barrier to entry.

So what makes one business thrive better than another business? There must be something special. In one example, Charlie Munger recommended the autobiography of Les Schwab “Les Schwab Pride in Performance: Keep It Going.” According to Munger, “Schwab ran tire shops in the Midwest and made a fortune by being shrewd in a tough business by having good systems.” That was Schwab’s specialty.

At GEICO insurance, the cost advantage present is a barrier for competitors. Can they match GEICO in cost or service? Buffett stated that GEICO's direct marketing gave it an enormous cost advantage over competitors that sold through agents. What about size and capital rating? Well, GEICO certainly has strong backing, and Berkshire Hathaway’s other insurance and reinsurance operations also benefit from the size, rating, and “time tested” operational soundness of its business organization.

This ability to endure over time, in good times and in bad, and continue to earn a solid profit is an important competitive advantage that helps make a company a “wonderful business.” Sometimes, that comes about because of decent economics plus superior managements who work to build a stronger moat in the product or service by creating a special “brand” impression.

Talking about less competitive and weaker businesses, Warren Buffett said, “In many industries, differentiation simply can’t be made meaningful. A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable.” However, these are a few exceptional businesses. In many industries, such enduring winners do not exist. So, for the great majority of businesses selling “commodity” products, Buffett believes that a depressing equation of poor business economics prevails. In his view, “a persistent over-capacity without administered prices (or costs) equals poor profitability.”

Buffett and Munger like strong brands like those of Coke, Gillette, and Kraft. These companies have increased their worldwide shares of market in recent years. Their brand names, the attributes of their products, and the strength of their distribution systems gives them competitive advantage. So what does this sustainable competitive advantage look like in numbers? Take a look at their 5-10 year records of FCF (Free Cash Flow) and ROE (Return on Equity) compared to those of competing businesses.

Consider why the Coca-Cola Company is such a good business from an investor’s point of view. Both Coke and Pepsi make products we enjoy. As an investor, I prefer the Coca-Cola Company. One reason is the amount of FCF generated for every sale.

Buffett also commented on the competitive arena of selling insurance. He said, “Insurers will always need huge amounts of reinsurance protection for marine and aviation disasters as well as for natural catastrophes. In the 1980s much of this reinsurance was supplied by ’innocents’ - that is, by insurers that did not understand the risks of the business - but they have now been financially burned beyond recognition.” In the world of marketing super-catastrophe insurance, Buffett said Berkshire Hathaway enjoys a significant competitive advantage because of its premier financial strength.

How does practical competitive advantage tie in with current academic thought? In his book, “Competition Demystified”, Bruce Greenwald of Columbia University presented a new and simplified approach to business strategy. The conventional approach to strategy taught in business schools is based on Michael Porter’s work. In Porter’s model, students can get lost in a sophisticated model of a business’ competitors, suppliers, buyers, substitutes, and other players.

Greenwald warns us to not lose sight of the big question, “Are there barriers to entry that allow us to do things that other firms cannot? “ Then, after establishing the importance of barriers to entry, Greenwald and Kahn argue that there are really only three sustainable competitive advantages; 1. Supply. A company has this edge when it controls an important resource: A company may have a proprietary technology that is protected by a patent. 2. Demand. A company can control a market because customers are loyal to it, either out of habit - to a brand name, for example - or because the cost of switching to a different product is too high. 3. Economies of scale. If your operating costs remain fixed while output increases, you can gain a significant edge because you can offer your product at lower cost without sacrificing profit margins.

Wal-Mart has shown its power in scale, and Charlie Munger put it this way: “Kellogg's and Campbell's moats have also shrunk due to the increased buying power of supermarkets and companies like Wal-Mart. The muscle power of Wal-Mart and Costco has increased dramatically.”

According to Professor Greenwald, the value of such a strong brand barrier can be estimated. It is about equal to its “difficult for competitor to match” reproduction costs.

In order to insure success, the operation of these good businesses must continue to be in the hands of first-class, able, trustworthy, and experienced managers. Focus on whether these competitive advantages are due to power in demand, supply, or economies of scale. However, in this book, we simplify this even more into “cost” and/or “special” advantages. Then, we discuss our impressions of whether their moats will endure over time.

Warren Buffett and Charlie Munger look for companies that have a) a business they understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. They like to buy the whole business or, if management is their partner, at least 80%. When control-type purchases of quality aren’t available, they are also happy to simply buy small portions of great businesses. Buffett said that it is better to have a part interest in the Hope Diamond than to own all of a rhinestone.

The dynamics of capitalism guarantee that competitors will repeatedly assault any business ’castle, that is earning high returns. Buffett and Munger believe that a great business must have an enduring ’moat’ that protects its excellent returns on invested capital. Strong barriers such as being the low cost producer (GEICO, Costco) or possessing powerful world-wide brands (Coca-Cola, Gillette, American Express, IBM, Kraft) are essential for sustained success.

Since business history is filled with companies with weak and temporary moats, their criteria of “enduring moat” caused Buffett and Munger to rule out companies in industries prone to rapid or continuous change. So, they avoid investing in technology companies. The chapter on IBM will explain why they recently invested in this technology related information solutions business.

Charlie Munger said, “How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.”

See's taught Buffett and Munger much about the evaluation of franchises. Both men admit that they have made significant money because of the lessons they learned at See's. See’s is a wonderful business.

In their talks and writings, they refer to a great business as a “franchise” or a “wonderful business.” Buffett wrote: “An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation. The existence of all three conditions will be demonstrated by a company's ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital. Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise's profitability, but they cannot inflict mortal damage.”

Buffet and Munger respect able and trustworthy managers. As you read about these 70 great businesses, think about the product or service that: (1) is strongly desired; (2) has no close substitute and; (3) has pricing power. As Buffett said, “A moat that must be continuously rebuilt will eventually be no moat at all. Additionally, this criterion eliminates the business whose success depends on having a great manager.”

While this book will help the reader learn more about enduring competitive advantages, here is a little reminder about Buffett and Munger’s contribution to behavioral finance and value investing. Their Four Filters innovation help us eliminate many prospects, and they help us find: “Understandable first-class businesses, with enduring competitive advantages, accompanied by first-class managements, available at a bargain price.”



AUDIO FILES FROM SELECTED CHAPTERS

The MOATS book introduction audio mp3 file: http://www.frips.com/moats.mp3

audio file of Wells Fargo, WFC chapter from MOATS book:
http://www.frips.com/wfc.mp3

audio file of the Johnson and Johnson chapter from MOATS:
http://www.frips.com/jnj.mp3

audio file of the Costco chapter in MOATS http://www.frips.com/costco.mp3

audio file of the American Express chapter: http://www.frips.com/axp.mp3

The IBM Chapter from MOATS. Why did Buffett buy into a technology services
company after so many years? http://www.frips.com/ibm.mp3

Here is a 1 min : 32 sec audio file of Warren Buffett talking about an
economic castle and its moat http://www.frips.com/wbmoat.mp3




The MOATS book introduction audio mp3 file: http://www.frips.com/moats.mp3
Thank You for mentioning the MOATS book project on your blog.
Moats will be out on Amazon.com in mid February, 2012.
It is currently available on Lulu.com here: http://www.lulu.com/spotlight/4filters

Major points of interest:

1. MOATS discusses 70 historically profitable businesses worthy of study.

2. MOATS examines the competitive advantages and sustainability of each business.

3. Each MOATS chapter has both a Warren Buffett and a Charlie Munger quote or idea weaved into the discussion.

4. The MOATS chapter on Lubrizol includes an estimated valuation based on Free Cash Flows.

5. Each MOATS chapter was checked by two people.

6. Even if you buy the MOATS hardcover edition, 50/70 is $0.72 value per business or chapter.

7. If you liked "Good To Great" by Jim Collins, you will enjoy MOATS 70 GREAT Berkshire Hathaway Businesses.




click here for a 5 chapter sample