70 THE WARREN BUFFETT WAY
popular Sensor, a razor with independently suspended blades. Gillette’s
consistent success is a result of its innovation and patent protection of its
new products.
Clayton Homes
In f iscal year 2002, Clayton reported its twenty-eighth consecutive
year of prof its, $126 million, up 16 percent from the year before, on
revenue of $1.2 billion.^11 This performance is all the more extraordi-
nary when we consider the fearsome problems that others in the indus-
try experienced. In the late 1990s, over 80 factories and 4,000 retailers
went out of business, a victim of two colliding forces: Many manufac-
turers had expanded too quickly and at the same time had made too
many weak loans, which inevitably led to widespread repossessions, fol-
lowed by diminished demand for new housing.
Clayton had a different way of doing business (more about their poli-
cies in Chapter 6). Its sound management and skillful handling of rough
times enabled the company to maintain prof itability even as competitors
were going bankrupt.
FAVORABLE LONG-TERM PROSPECTS
“We like stocks that generate high returns on invested capital,” Buffett
told those in attendance at Berkshire’s 1995 annual meeting, “where
there is a strong likelihood that it will continue to do so.”^12 “I look at
long-term competitive advantage,” he later added, “and [whether] that’s
something that’s enduring.”^13 That means he looks for what he terms
franchises.
According to Buffett, the economic world is divided into a small
group of franchises and a much larger group of commodity businesses,
most of which are not worth purchasing. He def ines a franchise as a
company whose product or service (1) is needed or desired, (2) has no
close substitute, and (3) is not regulated.
Individually and collectively, these create what Buffett calls a moat—
something that gives the company a clear advantage over others and pro-
tects it against incursions from the competition. The bigger the moat, the
more sustainable, the better he likes it. “The key to investing,” he says,