Investing in Great Businesses: Warren Buffett

Written By: Maxwell Fayans

Estimated Read Time: 3-4  minutes

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Investing= “Allocating resources to improve quality of life.”         -Tim Ferriss

After reading a blog post from Tim Ferriss regarding lessons from Warren Buffett, I decided to compile the key takeaways.

If there is one thing you should know: Never, never, never invest in something you don’t understand better than the majority.

Here is how to think of the great, good and gruesome companies:
To sum up, think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns. (2007)

Determining if a business is a great business:

• Those that have high returns on capital and that require little incremental investment to grow. (2009)
• 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)
• 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)
• A great business has pricing power or the power to raise prices without losing business to a competitor
• 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 best protection against inflation is a great business: (1) Has the ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume
• Businesses needing little in the way of tangible assets simply are hurt the least.
• Customer goodwill creates economic goodwill
• It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google (2007).

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