Bud Labitan - Moats : The Competitive Advantages of Buffett and Munger Businesses

Moats

The Competitive Advantages

Of Buffett & Munger Businesses

By Bud Labitan

First Edition

Copyright 2012

All rights reserved.

Printed in the United States of America.

No part of this book may be used or reproduced

in any manner without permission.

A truly great business must have an enduring moat that protects excellent returns on invested capital.

~ Warren Buffett

How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

~ Charlie Munger

Introduction

GOALS

Moats is designed to be a valuable learning resource for investors, students, and managers of business. It can also be used as a starting point for discussions about real competitive advantages in business schools around the world. This book is about the competitive advantages of 70 selected businesses that Warren Buffett and Charlie Munger bought for Berkshire Hathaway. (NYSE: BRK.A, BRK.B). Most of these businesses are wholly owned subsidiaries. A handful of them are partially owned through large stock (equity) investments.

Imagine these competitive advantages as protective moats around each economic castle. Will these economic moats endure over time? Over time, each customer makes up a part of that answer. Charlie Munger stated it this way: How do you compete against a true fanatic? You can only try to build the best possible moat and continuously attempt to widen it.

DEFINITION OF MOATS

Moats are barriers. One of the oldest moats surrounded the ancient Egyptian settlement of Buhen, on the West bank of the Nile River. During the medieval period, the kings of Europe would build wide and deep trenches filled with water around their castles. These moats were built as single or double protective barriers against invading armies. In business, we think of economic barriers that can both defend and injure the invading competition.

When I started this project, I searched the internet for images of castles with moats. Interestingly, I learned of Berkhamsted Castle and its double moat . ( http: //www.berkhamsted-castle.org.uk ) The Castle remains are located about 20 miles northwest from the center of London, at Brownlow Road, Hertfordshire, Berkhamsted, United Kingdom .

Charlie Munger said, Lets go for the wonderful business. So, after years of buying bargain-purchase" follies, Warren Buffett and Charlie Munger realized that it is much better to buy a wonderful company at a fair price than a fair company at a wonderful price. Now, when buying companies or common stocks, they look for first-class businesses accompanied by first-class managements.

What makes a first-class business wonderful? It must have one or more economic moats. Charlie Munger observed that capitalism is a pretty brutal place. Yet, some good businesses can survive a little period of bad management. Warren Buffett said A truly great business must have an enduring moat that protects excellen t returns on invested capital.

WHY THESE 70 BUSINESSES?

This book is about the competitive advantages of 70 of the many businesses that Warren Buffett and Charlie Munger bought for Berkshire Hathaway. Why did I focus on these 70? I took the names of the businesses listed on Berkshire Hathaways website and its link to its subsidiaries . Then I added a few of their largest stock investments. They are arranged alphabetically. My intent was to study the economic moats , learn more about them, and see which ones are growing and which ones are shrinking.

SOURCES OF INFORMATION

The information comes from multiple online sources. The most important sources come from each business publications and the annual letters of Warren Buffett to the shareholders of Berkshire Hathaway. Charlie Mungers letters and talks were also a great source of material. Other pieces of information were found by the many volunteers and students listed in the Appendix.

THANKS TO RESEARCH CONTRIBUTORS AND EDITORS

The research volunteers and contributors to this book were asked two basic questions. First, what are the competitive advantages of the business you are looking at? Secondly, are these advantages sustainable for the next ten years?