102 The Business of Value Investing- A strong franchise or brand that gives the company insula-
tion from most of the competition - Ability to raise prices ahead of inflation
Let ’ s look at some examples of businesses that have one or
more of these characteristics.“ The Security I Like Best ”
Insurance companies take in a lot of premiums up front and pay
out claims at a later date. Find an insurance business that masters
the art of taking in the most and paying out the least , and you have your-
self a wonderful business. Warren Buffett knew that when he found
GEICO, one of the nation ’ s largest auto insurers. He wrote an article
about the company, titled “ The Security I Like Best, ” when he was
21 — long before he bought it. Even then, Buffett saw that GEICO
had a recurring revenue stream that would never go away as long as
humans use cars.
By insuring drivers all over the country, GEICO naturally shields
itself from the risk of being geographically concentrated. It also has
a history of insuring the best drivers, so its claims payout is low. That
means GEICO can lower its premium, which it does. And that gives
the company a good, wide moat.Monopolistic Tendencies
Companies that dominate their industry tend to do quite well over
the long run. American Express is a wonderful example of a busi-
ness operating in a monopolistic type of industry. For decades,
credit cards and travelers ’ checks were synonymous with AmEx, and
if you look at the company today, you can still fi nd tons of cash gen-
eration, despite the current restrictive credit environment.
Home Depot and Lowe ’ s are other great examples of businesses
that own their industry. Without exception, Home Depot, Lowe ’ s,CH006.indd 102CH006.indd 102 9/2/09 6:58:08 PM9/2/09 6:58:08 PM