Market Selection Through Buffettology

Warren Buffet of Berkshire Hathaway is widely regarded as the world’s most successful investor. He has turned investor’s seed money of $105,000 into over $40 billion during the course of his lifetime by using a method referred to ”value investing.” Mary Buffett, the Warren’s daughter, explained his methods for investing in her book titled “The New Buffettology.”

Mary explains that the core of Buffett’s strategy is based on finding a company that holds a durable competitive advantage and/or ridiculously high inventory turnover. A durable competitive advantage is something like a patent, brand equity, simple product, etc. that allows a company to maintain high profit margins. Such companies have low fixed costs and low R&D costs. They create a product and that product is able to remain the same without much change over many years. Coca-Cola can do this, pharmaceuticals can’t.

Warren Buffet has made more money than any human being, save Bill Gates, by simply looking for and purchasing companies that posses a durable competitive advantage (while on sale during a bear market of course). If he’s lucky, these companies will also offer high inventory turnover, which makes for very, very attractive long-term profits.

If I am to create a successful business by selling a tangible product (not that I need to sell a product, but I may as well entertain the idea) that requires neither my time nor my money I suspect whatever I sell should have a durable competitive advantage of some sort. My product will need to have high margins and the way to do that is through creating an air of exclusivity.

The real difference between a Bic pen and a Mont Blanc is some metal around it. At the core, the two devices are meant to do one thing, offer a tool for transferring thoughts to paper. However, a Bic costs 30 cents. Mont Blanc “Writing Instruments” will cost you into the hundreds. Does it cost that much more to manufacture a Mont Blanc? Probably not. But the brand is designed around exclusivity and luxury.

Bic competes on costs, making it a commodity price-oriented product with very low margins. The problem with competing on price is that gaining a competitive edge means making less money, or another way of looking at it is over time you’ll need to be doing the more work to maintain the same income. Mont Blanc competes on emotion, meaning price has nothing to do with it. That gives Mont Blanc the scent of a durable competitive advantage.

For me, I think its safe to say that I prefer the opportunity to come up with an idea for a luxurious product to a commodity product. I’d even go so far as to say I cannot sell a commodity product if I wanted to becuase I will most likely be charged a per-transaction fee by the vendors who handle the logistics side of orders. This will eat into a commodity product’s already non-existent profit margins, making it much harder to reach my goals.