Buffett on evaluating businesses' "moats" · Transcript

CharlieI'd like you to drill down with us and tell us what to you are the signs of great management and economic moats. The moat in the management are part of the valuation process in that they enter into our thinking as to the degree of certainty that we attribute to the stream of income, stream of cash, actually, that we expect in the future, and the amount of it. I mean, it is, you know, it is, it's an art in terms of valuation of businesses. The formulas get simple at the end, but if you and I were each looking at the chewing gum business, we own no Wrigley, so I use Wrigley's fairly often in class, pick a figure that you would expect unit growth of chewing gum, you know, to grow in the next 10 or 20 years. give me your expectations on how much pricing flexibility you have, how much danger there is that Wrigley's share of market is dramatically reduced. You can go through all of that. That's what we go through. That is, and in that case, we are evaluating the moat. We are evaluating the price elasticity, which interacts with the moat in certain ways. We're evaluating the likelihood of unit demand changing in the future. We're evaluating the likelihood of the management being, either very bright with the cash that they develop or being very stupid with it. And all of that gets into our evaluation of what that stream of money looks like over the years. But the value of how the investment works out depends on how that stream develops over the next 10 or 20 years. If you have a strong, big enough moat, you don't need as much management. You know, gets back to Peter Lynch's remark that he likes to buy a business that's so good that an idiot can run it because sooner or later one will. That's, I mean, he was saying the same thing. I mean, he was saying that what he really likes is a business with a terrific moat where nothing can happen to the moat. And there aren't very many businesses like that. But then, so you get it, you get involved in evaluating all these shadings. This, not the cherry version, but the regular version, this one has a terrific moat around it. There's a moat even in this, you know, in the container. There was some study made as to what percentage of people could identify blindfolded what product they were holding just by grabbing the container. And there aren't many that could score like Coca-Cola in that respect. So here you've got a case where that product has a share of mind. There's 6 billion people in the world. I don't know what percentage of them have something in their mind that's favorable about Coca-Cola, but it would be a huge number. And the question is, 10 years from now, is that number even larger, and is the impression just a slight bit more favorable on average for those billions of people that have it? And that's what the business is all about.