Sustainable Competitive Advantages
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Sustainable Competitive Advantages
Even if a business is easy to understand, Warren Buffett won’t attempt to value it if its future cash flows are unpredictable. He wants to own simple, stable businesses that possess sustainable competitive advantages. Companies with these characteristics are highly likely to generate materially higher cash flows with the passage of time. Without these characteristics, valuation estimates become very uncertain.
Things To Know
- He wants to own simple, stable businesses with sustainable competitive advantages.
A sweet, classic American example
His large stake in Coca-Cola provides us with an example of the type of company he favors. Coca-Cola is more than 100 years old, and it has been selling essentially the same product during its entire existence. Coke was the leading soft drink in 1896 just as it is today. It seems unlikely that customers will ever lose their taste for it. Buffett believes that the product and the Coca-Cola brand are durable competitive advantages that will enable the company to earn economic profits for shareholders for many years to come.
Why he avoids high-tech
On the other hand, technology is a fast-changing industry where the leading company of today can be driven out of business tomorrow by more innovative rivals. Market-leading products are always vulnerable to obsolescence. Thus, even if Buffett had technological expertise, he would be reluctant to invest in the industry because he couldn’t be confident that a technology company’s cash flows would be materially higher in 10 or 20 years, or even that the company would still exist.