There are some businesses that are better than others. Call it a business franchise or a competitive advantage if you will, but some firms will plainly be more profitable than others. Their economics are better.
A great example of this comes from Richard Branson, long before he became a Sir. When asked how to become a millionaire, he replied, 'That's easy. First you become a billionaire and then you buy an airline'. To the best knowledge of your author, there has been only one consistently profitable airline for the last fifteen years or so, Quantas in Australia. Regular news stories about the woes of British Airways, Alitalia and almost every American carrier you care to name reinforce the point.
There are other businesses which suffer in similar ways. Almost
every textile company in the western world has had huge problems. They
may have had the finest management in the world, but they were simply in
the wrong industry. In fact, Warren Buffett describes his purchase of Berkshire Hathaway to be his $200 million mistake, because he believes that if he had purchased a different (profitable) business, that is how much his purchase money might be worth now. Ouch.
On the other hand, most big oil, gas, tobacco firms etc have done superbly. Every business has it's ups and downs and cyclical movements, but the more successful firms prosper.
Former state utilities such as water, gas and electricity also do
well. Whilst they are regulated, they generally have, or had, some sort
of monopoly. This always helps profits! To quote an old phrase, in some businesses, the economics are so effective that a manager simply needs to be able to "keep the lights on".
Legendary investor Philip Fisher first wrote of the business franchise. He viewed it as a protective moat which would protect it from competitors. It is an opinion which has been proven by Warren Buffett over decades of outperformance.
Buffett has specifically targeted companies with a competitive
advantage. These include Disney, Coca Cola, Gillette and many more. You
could say that it has worked out well enough for him. It might not be so obvious that a firm like Coca Cola has a competitive advantage - after all there are lots of companies that make fizzy drinks. However, the firm has an incredible global distribution channel, some of the best global brand awareness of any company ever and a wide number of other similar drinks to distribute throughout these retailers. When you factor in a high profit margin that enables significant advertising and a "secret recipe", they have a very strong business base to work from.
There are factors to look out for which will suggest that a firm may have a business franchise. For example:
Patents or copyrights
High class brand names
Industry dominance or an established position of strength in a niche market
A great example would be a toll bridge. If you want to pass, you have to pay and there is usually very little option for the traveller. This is truly a competitive advantage! There are very few in private hands, but Buffett has owned part of one in America for years.
One of his many famous quotes is, "I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will". This provides an interesting insight into the impact of business and industry economics on a business - he thinks that the stronger the underlying factors, the less important management skill becomes. Many of us have worked in businesses where the incompetence of the boss seemed to be limitless and yet the firm prospered. Buffett clearly tries to find such firms and then find the best management he can as well.
A robust business model?
A related concept that Nassim Nicholas Taleb writes about in his 2013 book, Antifragile is that of the Triad. He explains how in many areas of life, nature and the world, things can be grouped into one of three camps: Fragile, Robust and Antifragile.
While there probably are not many businesses that are truly antifragile (by his standards), there are many that are fragile and could face severe problems because of an unplanned or unwanted (but likely) event. An example of this might be a farmer that loses a crop due to drought or flood. While the drought or flood might be unwelcome, they happen and it is wrong not to expect them every few years.
He also describes how within the second camp, robust, there are factors that make things less likely to be harmed by outside or unexpected factors. In this regard, there are some businesses that are simply stronger due to one or more factors than some others are. It is these that Warren Buffett is describing.
It's not luck
It does appear that Buffett's long-term time horizon and careful thought about a business model provide some sort of advantage over many other Wall Street asset allocators. These firms are available on NYSE for investment to everyone else as well, but he seems to be able to select them at the right time and price in a way that few others can match.
In this regard he seems to be something of a business / investment / stock market philosopher and it would appear that the slower pace of his approach and lack of pressure from investors and a fund management firm employer to invest under the wrong circumstances helps him tremendously.
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