Wednesday, 11 December 2013

Relationship between businesses, castles and moats

Warren Buffett on competitive moats

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Q: You were the first person to use the term “moats” as competitive advantage. Morningstar has built on this. What do you think about Morningstar’s work on moats?

WB: I think they’re doing a great job. I came up with this term 40+ years ago because in capitalism, you have these economic castles. Apple, Microsoft, etc. Some have smaller castles. If you have a castle in capitalism, people are going to try to capture it.

You need 2 things – a moat around the castle, and you need a knight in the castle who is trying to widen the moat around the castle.

How did Coca-Cola build their moat? They deepened the thought in people’s minds that Coca-Cola is where happiness is. The moat is what’s in your mind. Railroad moats are barriers to entry. Geico’s moat is low prices. Every day we try to widen the moat.  See’s Candies creates a moat in the minds of consumers.  It is a more effective gift on Valentine’s Day than Russell Stover.  See’s Candies has raised its price every year on December 26 for 41 years.  BRK bought See’s Candies for $25 million in 1972.  Today it earns $80 million.  Richard Branson failed 10 years ago with Virgin Cola.  Snickers has been the number one candy bar for 40 years.

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