I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.
I bought a company in the mid-’90s called Dexter Shoe and paid $400 million for it. And I gave about $400 million worth of Berkshire stock, which is probably now worth $400 billion. But I’ve made lots of dumb decisions. That’s part of the game.
An irony of inflation-induced financial requirements is that the highly profitable companies – generally the best credits – require relatively little debt capital. But the laggards in profitability never can get enough. Lenders understand this problem much better than they did a decade ago – and are correspondingly less willing to let capital-hungry, low-profitability enterprises leverage themselves to the sky.
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.
The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
I have no views as to where it [gold] will be, but the one thing I can tell you is it won’t do anything between now and then except look at you. Whereas, as you know, Coca-Cola will be making money, and I think Wells Fargo will be making a lot of money and there will be a lot – and it’s a lot – it’s a lot better to have a goose that keeps laying eggs than a goose that just sits there and eats insurance and storage and a few things like that
The greatest investment reward comes to those who by good luck, or good sense, find the occasional company that over the years can grow in sales and profits far more than industry as a whole.
Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it’s the lack of change that appeals to me. I don’t think it is going to be hurt by the Internet. That’s the kind of business I like.
We like stocks that generate high returns on invested capital where there is a strong likelihood that it will continue to do so. For example, the last time we bought Coca-Cola, it was selling at about 23 times earnings. Using our purchase price and today’s earnings, that makes it about 5 times earnings. It’s really the interaction of capital employed, the return on that capital, and future capital generated versus the purchase price today.
My own preference is an investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investments. Farms, real estate, and many businesses such as Coca-Cola, IBM, and our own See’s Candy meet that double-barreled test.