Warren Buffett’s Berkshire Hathaway didn’t become the powerful $290 billion company it is without help. Buffett manning the helm was a major reason for the company’s success.
As Berkshire Hathaway chairman, Buffett has made several incredible investments in a number of different industries, including consumer products and financial services. Although each investment differed in its own way, there were also three very distinct similarities.
High Pricing Power Brands
When Buffett looks at a company, he tries to find those that will be able to survive for decades, and even centuries for that matter. Pricing power is one of the main attributes in Buffett’s portfolio, meaning the companies can pass on price increases to consumers without any problem.
An excellent example is See’s Candy. Berkshire bought this company in 1972 for $25 million. It currently earns $80 million per year at this time. The company has not grown tremendously since it was purchased, but it has the ability to raise its prices in the marketplace. Since Buffett acquired the company, See’s has raised their prices each year for the past 41 years.
When a company possesses pricing power, the business will benefit from consistent inflation.
High Staying Power Brands
Building a solid company is one thing. But it’s another thing altogether to build a great company, meaning one that will live on forever.
Buffett often talks about his great companies. Gillette, as an example, is one of the companies with a gross margin of 40% or more that sells razors, and this business will always be in demand. The Snickers brand comes from Mars, and it’s been the most popular candy bar for the last 40 years running. Coca-Cola, the old faithful, is the leading cola provider since carbonated beverages first found their way into the world.
The Name of the Game Is Interest-Free Financing
If you never have to repay a loan, is it actually a loan?
Warren Buffett understands this concept better than anyone else. His insurance company generates float, which is the money that it receives from premiums that have to potentially get paid out at a future date. If a business is constantly bringing in float, and it grows year after year, it can borrow money at 0% and never even repay the debt.
Buffett’s best purchases were in pursuit of float. He bought Blue Chip Stamps in 1962. The company had a loyalty program, and stores would pay Buffett’s company to provide rewards for customers. The customers would later redeem these rewards via stamps for products like silverware or furniture. Buffett used this float money to purchase See’s Candy.
Walmart is another similar story. The company pays suppliers after receiving money from customers. This gave Sam Walton the ability to open many new stores which his vendors partially financed. Where does Buffett fit into this picture? It’s one of his core stock holdings.
What’s the Secret to Buffett Success?
As you can see, there clearly is no secret. He’s been very open and honest about his investing strategies all along. He’s a great teacher and he always provides phenomenal investing tips in his letters to shareholders. Study the man, learn from him and you can also achieve massive success as an investor.