What Is a Great Company

 What Is a Great Company

 

        What we want is a company with a durable competitive advantage. The world’s greatest investor Warren Buffet has figured out that these super companies come in three basic business models: They sell either a unique product or a unique service, or they are the low-cost buyer and seller of a product or service that the public consistently needs. 

Let's take a good look at each of them. Selling a unique product: This is the world of Coca-Cola, Apple, Wrigley, Pepsi, Budweiser, Coors, Kraft, The Washington Post, Procter & Gamble, and Philip Morris. Through the process of customer need and experience, and advertising promotion, the producers of these products have placed the stories of their products in our minds and in doing so have induced us to think of their products when we go to satisfy a need. Want to have a phone? You think of apples. Want to chew some gum? You think of Wrigley, Feel like having a cold beer after a hot day on the job? You think of Budweiser. And things do go better with Coke. 

Top-level investors like to think of these companies as owning a piece of the consumer's mind, and when a company owns a piece of the consumer's mind, it never has to change its products. The company also gets to charge higher prices and sell more of its products, creating all kinds of wonderful economic events that show up on the company's financial statements.

 Selling a unique service: This is the world of Moody's Corp., H & R Block Inc., American Express Co., The Service Master Co., and Wells Fargo & Co. Like lawyers or doctors, these companies sell services that people need and are willing to pay for - but unlike lawyers and doctors, these companies are institutional specific as opposed to people specific. When you think of getting your taxes done you think of H & R Block, you don't think of Jack the guy at H & R Block who does your taxes. When Warren buffet bought into Salomon Brothers, an investment bank ( now part of Citigroup ), which he later sold, he thought he was buying an institution. But when top talent started to leave the firm with the firm's biggest clients, he realized it was people specific. In people-specific firms, workers can demand and get a large part of the firm's profits, which leaves a much smaller pot for the firm's owners/shareholders. And getting the smaller pot is not how best investors get rich. 

The economics of selling a unique service can be phenomenal. A company doesn't have to spend a lot of money on redesigning its products, nor does it have to spend a fortune building a production plant and warehousing its wares(CAPEX), Firms selling unique services that own a piece of the consumer's mind can produce better margins than firms selling products. 

Being the low-cost buyer and seller of a product or service that the public has an ongoing need for: This is the world of Wal - Mart, Costco, Nebraska Furniture Mart, Borsheim's Jewelers, and the Burlington Northern Santa Fe Railway. Here, big margins are traded for volume, with the increase in volume more than making up for the decrease in margins. The key is to be both the low-cost buyer and the low-cost seller, which allows you to get your margins higher than your competitor's and still be the low-cost seller of a product or service. The story of being the best price in town becomes part of the consumer's story of where to shop. In Omaha, if you need a new stove for your home, you go to the Nebraska Furniture Mart for the best selection and the best price. Want to ship your goods cross-country? The Burlington Northern Santa Fe Railway can give you the best deal for your money. Live in a small town and want the best selection with the best prices? You go to Wal - Mart.

After combining all these factors you can come up with a decision that great companies are made up of all factors like Durable competitive advantage, honest management, customer mind share, low CAPEX requirement, pricing power, and brand loyalty.