Warren Buffet happens to be one of the most influential people the Investing world has ever seen and he falls in line with the evergreen investing greats like Benjamin Graham. John.D.Rockefeller. His letters to the Shareholders of the Berkshire Hathaway, Inc are laden with rich information on solid investing and this articles series plumbs into all of that priceless information. This article is about Warren Buffet’s views on three kinds of businesses -- the extraordinary ones, the average ones and lastly, businesses of the worst kinds.
The Good Businesses
According to Mr. Buffet, the chairman of Berkshire Hathaway Corp, the best businesses are those that have a way to allow you to tap into multiple streams of income with you putting in barely any amount of money into it. In a letter addressed to his company’s shareholders, Mr. Buffet explains this with an example of one of his holding companies called See.’s Candy. Apparently, this company happens to be one of the best examples for rock solid businesses because ever since his group had purchased it to date, it had allowed his company to invest the resultant streams of income into other profitable ventures, apart from having made him close to a whopping $1.35 in pre-tax earnings.
He recalls that the company, when it was purchased in 1972, had pre-tax earnings of $5 million and it now makes about $82 million pre-tax profits (as of last year). To see a growth like that, you would typically see a company investing about $400 million on net tangible assets, according to him. But, this equation (which most businesses tend to follow) is vastly different and much less profitable than the one we see at See’s Candy, Microsoft or Google.
The Average Business: An average business -- not-so-bad-not-so-good kind of business -- as Mr. Buffet states in his letter is the kinds that need a lot of money to make a lot of money. An example he uses to enunciate this is one of their other companies called FlightSafety. An extremely asset intensive (all those flight stimulators which are expensive and then they need to keep changing them or buying new ones as new plane models are launched all running into billions of Dollars). This business, according to him, has a strong market presence and has a unique selling proposition; it even has a strong competitive advantage. Mr. Buffet feels that this is just a so-so business simply because it might make a lot of money in the future, but we would have put in almost that much to make that money.
The Bad Business: “Gruesome” is the word Mr. Buffet uses to describe business such as these which grow rapidly, need a lot of capital to fund this growth and then will not make any or little money. As an example, he cites the disappointing returns fetched by the Airlines. He says that companies rush after starting and running airlines and pour a lot of money in; these companies grow and then they barely make any returns on the investment.