Would Warren Buffett Invest in Your Business?
Mark O’Hare, a senior partner at accounting firm Grant Thornton, is a long-time follower of the US business magnate and legendary investor, Warren Buffett. Last month, Mark, who is based in the Brisbane office, arranged for the American writer, Robert Miles, who has written several books on the great man and his company Berkshire Hathaway*, to come and talk to Grant Thornton clients on why the investment strategy developed by Buffett has been so extraordinarily successful over decades.
The audience was particularly fascinated by the ‘moat’ theory that is central to the Buffett investment philosophy. It is interesting to note that there is a close correlation between this strategy and the mfCEOs 9 Boxes process and the importance of raising marketing from a tactical resource to become an integral part of a business’ strategy.
I’m delighted Mark has agreed to discuss the concept of the ‘moat’ in more detail and how its application can increase the value of your business.
Mark O’ Hare, senior partner Grant Thornton
Warren Buffett, the billionaire business magnate and chair of Berkshire Hathaway, is considered by many (myself included) to be one of the most successful investors in the world.
Over my 25 years at Grant Thornton I have acted as advisor to many private businesses, working alongside CEOs to manage sustainability and profitable growth. Throughout that time I have studied the strategy employed by Buffett because I have an innate curiosity about why some businesses are successful, others very successful and some just outstanding. I’ve read the views of people who have had unprecedented access to him, such as Buffett scholar and Berkshire Hathaway authority, Robert Miles, and attended multiple conferences convened by him in Omaha. Additionally, I have attended the past seven Berkshire Hathaway AGMs at which Buffett has spoken for many hours on a range of matters, including the reasons behind Berkshire Hathaway’s success. So I think you’d call me a fan.
One of the key tenants of the Buffett strategy in assessing the potential of a business is the concept of the ‘moat’. He says, “In business I look for economic castles, protected by unbreachable ‘moats’.” And his theory is, the wider that ‘moat’ the more likely the company is assured of success, over time.
There are basically four filters that Buffett applies when looking to acquire the stock of a company:
- Does he understand the business?
- Is there an ethical management team in place that is ‘able and honest’?
- Is the price sensible, given the vicissitudes of business life?
- Does the business have certain intrinsic characteristics that are sustainable and compelling? In other words, does it have a sustainable competitive advantage to protect its long-term profitability and protect its market share from erosion by competitors?
These intrinsic characteristics create the moat that makes a business easier to defend from competitors. Just as a medieval castle with a wide moat could be protected better than a castle with a narrow moat, the wider the moat a company can create around it, the less vulnerable it is from attack.
The two questions Buffett asks his CEOs and mangers each year are: “How did you do, given the prevailing economic climate?” and “What did you do to widen the moat?”
What are these intrinsic characteristics that can prevent your competitors from taking market share and eroding your margins? Ideally you’re looking to create high-cost barriers, which prevent potential competitors entering your market. Here are some examples:
Low cost production: Do you have a unique way to undercut your rivals on price? Do you have economies of scale that can’t be matched?
High switching costs: Is your customer deterred from incurring switching to a competitor because it’s very inconvenient or there is a high cost involved in doing so?
Network effect: Does the value of your product or service increase for both new and existing users when more people join it? Think eBay.
Intangible assets: Do you have protective patents or intellectual property that prevent competitors from replicating what you offer? Do you have strong supplier or tenancy agreements that can’t be equalled? Or do you have a strong brand that has developed strong customer loyalty and that makes people come back to you time after time – think Coca Cola, Apple and Google.
So, to reiterate, if you want to build a successful business to last the test of time, you need to continually look to widen the moat around it - creating as many barriers for your competitors as possible, and ones that are sustainable over time. Buffett always asks the question of a potential investment opportunity: “What would it cost me to destroy your moat?”
Take a look at your own business’ moat. If it’s wide, then it’s an indication that it’s a strong business that is going to succeed in the long term - not just in the short term. It could also be a business in which Warren Buffett (or others) might want to invest!
Email Mark O'Hare: Mark.OHare@au.gt.com
Debbie Richardson, founder of mfCEOs comments
As I listened to Robert Miles’s presentation, the moat theory resonated strongly with me in relation to the work we undertake with our clients at mfCEOs. To use Buffett’s own term, strategic marketing can have a considerable impact on widening your moat. The first area we ask clients to work on is usually ‘Positioning’, creating a strong differentiation in the market that will attract buyers, build brand loyalty and be difficult for competitors to reproduce.
The other eight modules of our structured framework are focused also on building and sustaining this clear market position: understanding your buyers’ journey, establishing effective channels to market, building the right capabilities to help you make intelligent and better-informed decisions about strategic marketing in your organisation, etc, etc.
Strategic marketing not only helps widen your moat. Strengthening and improving your marketing function will also deliver measurable results that positively impact on your revenue, turning your marketing resource into a sustainable revenue-generating stream.
Having your marketing strategy aligned to your business strategy is a hallmark of a successful business. In addition, if you continually monitor the width and depth of your moat, as advocated by Warren Buffett, you’ll have a business that not only keeps ahead in the market, but also sustains profitable growth into the long term.
*If you want to read more about Buffett’s moat theory and his other business strategies then take a look at Robert Miles’s books: The Warren Buffett CEO: Secrets From the Berkshire Hathaway Managers and 101 Reasons To Own the World's Greatest Investment: Warren Buffett's Berkshire Hathaway
In the past 50 years Berkshire Hathaway holding company has delivered a 20.8% compounded annual return to shareholders and has grown to a stunning market value of US$372 billion (£278 billion / AU$483 billion). It has achieved this by building an unprecedented range of interests in the business world, commanding positions in insurance, US railways, energy and housebuilding alongside stakes in global giants including Coca-Cola, Kraft Heinz and IBM.