Investing Guidelines: Business Tenets 71“is determining the competitive advantage of any given company and,
above all, the durability of that advantage. The products or services that
have wide, sustainable moats around them are the ones that deliver re-
wards to investors.”^14 (To see what a moat looks like, read the story of
Larson-Juhl in Chapter 8.)
A franchise that is the only source of a product people want can
regularly increase prices without fear of losing market share or unit vol-
ume. Often a franchise can raise its prices even when demand is f lat and
capacity is not fully utilized. This pricing f lexibility is one of the def in-
ing characteristics of a franchise; it allows franchises to earn above-
average returns on invested capital.
Another def ining characteristic is that franchises possess a greater
amount of economic goodwill, which enables them to better withstand
the effects of inf lation. Another is the ability to survive economic
mishaps and still endure. In Buffett’s succinct phrase, “The def inition of
a great company is one that will be great for 25 to 30 years.”^16
Conversely, a commodity business offers a product that is virtually
indistinguishable from the products of its competitors. Years ago, basic
commodities included oil, gas, chemicals, wheat, copper, lumber, and
orange juice. Today, computers, automobiles, airline service, banking,
and insurance have become commodity-type products. Despite mam-
moth advertising budgets, they are unable to achieve meaningful prod-
uct differentiation.
Commodity businesses, generally, are low-returning businesses and
“prime candidates for prof it trouble.”^17 Since their product is basically
no different from anyone else’s, they can compete only on the basis of
price, which severely undercuts prof it margins. The most dependable
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Look for the durability of the franchise. The most important
thing to me is f iguring out how big a moat there is around the
business. What I love, of course, is a big castle and a big moat
with piranhas and crocodiles.^15
WARRENBUFFETT, 1994