Wednesday, 28 March 2018

Durability is Warren's ticket to riches


Warren has learned that it is the "durability" of the competitive advantage that creates all the wealth. Coca-Cola has been selling the same product for the last 122 years, and chances are good that it will be selling the same product for the next 122 years.

It is this consistency in the product that creates consistency in the company's profits. If the company doesn't have to keep changing its product, it won't have to spend millions on research and development, nor will it have to spend billions retooling its plant to manufacture next year's model. So the money piles up in the company's coffers, which means that it doesn't have to carry a lot of debt, which means that it doesn't have to pay a lot in interest, which means that it ends up with lots of money to either expand its operations or buy back its stock, which will drive up earnings and the price of the company's stock---which makes shareholders richer.

So when Warren is looking at a company's financial statement, he is looking for consistency. 
  • Does it consistently have high gross margins? 
  • Does it consistently carry little or no debt? 
  • Does it consistently not have to spend large sums on research and development? 
  • Does it show consistent earnings? 
  • Does it show a consistent growth in earnings? 

It is this "consistency" that shows up on the financial statement that gives Warren notice of the "durability" of the company's competitive advantage.

The place that Warren goes to discover whether or not the company has a "durable" competitive advantage is its financial statements.

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