2000: What are good sources for learning more about types of competitive advantages?

AUDIENCE MEMBER: Good morning, gentleman. My name’s Marc Rabinov from Melbourne, Australia.

You’ve emphasized the importance of the moat around a business, or the sustainable competitive advantage. My question really relates to learning more about that.

Professor Michael Porter at Harvard has made a detailed study of this. Did you find his work useful and can you recommend any other sources of information on this?

WARREN BUFFETT: Yeah, I’ve never really read Porter, although I’ve read enough about him to know that we think alike, in a general way. So I can’t refer you to specific books or anything. But my guess is that what he writes would be very useful for an investor to read.

I mean, I — again, I’ve never — I’ve just seen him referred to in some commentary. But I think he talks about durable or sustainable competitive advantage as being the core of any business. And I can tell you that that is exactly the way we think.

I mean, that — in the end, you — if you are evaluating a business year-to-year, you want to — the number one question you want to ask yourself is whether the — could the competitive advantage have been made stronger and more durable before — and that’s more important than the P&L for a given year.

So I would suggest that you read anything that you find that’s helpful or —

Actually, the best way to do it is study the people that have achieved that and ask yourself how they did it and why they did it. I mean, why is it that in razor blades, which could —

I mean, everybody grows up in business school hearing that as a great example of a product that’s very profitable and why —

With it obvious that there’s going to be no reduction in demand for the next hundred years for the product, why are there no new entrants into the field? What it is that gives you that moat around the razor blade business?

Normally, if you’ve got a profitable business, you know, a dozen people want to go into it. If you’ve got a dress shop here in town and it looks like it’s doing well, you know, a couple of other people are going to want to open up a shop next door to it.

And here’s a worldwide business, nothing can go wrong with the demand, to speak of. And yet, people don’t go into it.

So, we like to ask ourselves questions like that. We like to ourselves, “Why was State Farm successful, you know, against people that had incredible agency plants and lots of capital?”

And here’s some farmer out in Bloomington, Illinois named George Mecherle , you know, who’s in his forties. And he sets up a company that defies capitalistic imperatives.

I mean, it has no stock, it has no stock options, it has no big rewards. It’s, you know, it’s kind of half socialistic. And all it does is take 25 percent of the market away from all of these companies that had all these characteristics.

We believe you should study things like that. We think you should study things like Mrs. B out at the Nebraska Furniture Mart, who takes $500 and turns it, you know, over time, into the largest home furnishing store in the world. There has to be some lessons in things like that. What gives you that kind of a result and that kind of competitive advantage over time?

And that is the key to investing. I mean, if you can spot that — particularly if you can spot it when others don’t spot it so well — you’re on the — you know, you will do very well. And we focus on that.

Charlie?

CHARLIE MUNGER: Yeah, it — these factors — every business tries to turn this year’s success into next year’s greater success. And they all use pretty much every advantage they have in every direction from this year to make next year’s better.

Microsoft did exactly that, year after year after year and happened to win big.

And it’s hard to see — for me at least — to see why Microsoft is sinful because they tried to improve the products all the time and make next year’s business position stronger than last year’s business position. (Applause)

If that’s a sin, every subsidiary at Berkshire is a sinner, I hope. (Laughter)

WARREN BUFFETT: Yeah, yeah, yeah. We declare ourselves for sin. (Laughter)