The Business of Value Investing.pdf

Effective Business Valuation 105

build a new soft - drink company to compete with Coke, you couldn ’ t

do it no matter how brilliant you are. Although the Coke fran-

chise is unique in the world, plenty of examples exist. Johnson &

Johnson, Wrigley ’ s, and Gillette are names that easily come to mind.

You need look no further than these companies to see the awe-

some value of a franchise. Coca - Cola benefi ts from the advantage of

having high switching costs. As you drink more Cokes, you begin to

develop a habit that ’ s hard to break. Or as Buffett remarks, who is will-

ing to save a nickel on chewing gum, a product that you put in your

mouth? I can ’ t think of anyone who will give up Coke for another

brand to save a dime per can. If you ’ re traveling in a foreign country,

I ’ d be willing to bet that you grab a Coke, not the local brand. Coke

has an amazing moat that will likely stay strong for a very long time.

Same goes for Gillette razors. Buffett loved the idea that each

morning millions of men woke up to use a product they would have

to replace on a regular basis. How many people would sacrifi ce the

safety of their face or legs to go with a cheaper, inferior razor?

When you can fi nd a company with a truly remarkable, durable

competitive advantage at an attractive price, you can follow Buffett ’ s

mantra about holding stocks forever. As you can surmise from the

names listed, it ’ s not easy to build up a franchise. Many of the most

dominant businesses have been around for decades and have spent

billions over many years developing themselves. But the efforts and

expenditures can pay off immensely. Franchise businesses consist-

ently earn rates of return way above their cost of capital, and they

do so without serious threat from outsiders.

While the best returns may have already come and gone for

businesses such as Coke and Home Depot, capitalism never fails to

produce a new crop of companies in industries that could become

the next investment of the same caliber. Great investments like this

aren ’ t easy to fi nd. But they are out there, and a little diligence

(and good search strategy) can lead you to them.

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