American conglomerate Berkshire Hathaway didn’t grow to become a US$290b company without some help. Having Warren Buffett at the helm helped a lot. As Chairman of Berkshire, Buffett’s made several outstanding investments in industries ranging from financial services to consumer products. And although these investments differed in some ways, they all shared surprising similarities. 1. Brands that have pricing power Warren Buffett looks for companies that can survive and thrive over decades, even centuries. One common attribute of Buffett’s best portfolio companies is pricing power — the ability to pass on price increases to consumers. See’s Candies is…
American conglomerate Berkshire Hathaway didn’t grow to become a US$290b company without some help. Having Warren Buffett at the helm helped a lot.
As Chairman of Berkshire, Buffett’s made several outstanding investments in industries ranging from financial services to consumer products. And although these investments differed in some ways, they all shared surprising similarities.
1. Brands that have pricing power
Warren Buffett looks for companies that can survive and thrive over decades, even centuries. One common attribute of Buffett’s best portfolio companies is pricing power — the ability to pass on price increases to consumers.
See’s Candies is an excellent example. Berkshire Hathaway purchased the company for $25 million in 1972. Today, it earns $80 million per year. See’s Candies has not grown tremendously — it’s still a West Coast confectioner — but it has raised prices. In fact, Buffett’s raised prices every single year for 41 years since he acquired the company.
Other Berkshire mainstays have this attribute. Fizzy-drinks maker Coca-Cola’s prices have only gone up over time. In a similar vein, automobile values have gone up over history, and so have the insurance premiums auto-insurer Geico charges its customers. Prices for consumer goods have only risen, driving merchant processing volume at credit card outfit American Express.
When a brand has pricing power, it benefits from the consistent, perpetual tailwinds of inflation.
In Singapore, analysts from brokerages Maybank Kim Eng and CIMB also see healthcare operator Raffles Medical Group (SGX: R01) carrying pricing power (just to be clear, Raffles Medical is not among Buffett’s portfolio). After all, healthcare services can be deemed almost like a necessity for patients who are seeking medical care.
2. Brands that have staying power
It’s one thing to build a good company. It’s another to build a great company – a company that can live on forever.
Warren Buffett often talks of his great companies. Gillette, for instance, is a company with gross margins in excess of 40% that sells a product (razors) that will always be in demand. Mars owns the Snickers brand, the top candy bar in the world for 40 years straight.
And of course there’s ol’ reliable, Coca-Cola, which has been the leading cola ever since the birth of the lovely carbonated beverage.
Buffett also owns a huge block of shares in giant US bank Wells Fargo, and banks provide a service – channelling funds from depositors into worthwhile investments – that will always be in demand too.
That’s also how a Singapore-listed bank like Oversea-Chinese Banking Corporation (SGX: O39) (again, having no relation to Buffett) have been in existence since 1912 and seen its profits jump more than five-fold from S$477m in 1998 to S$2.61b in the last 12 months.
3. Interest-free financing
If a loan never has to be repaid, is it really a loan at all?
Warren Buffett understands this well. Insurance companies generate what is called a float — money received in premiums that will be paid out on some unknown date in the future, if at all. If a company continuously creates a float, which only grows in size year after year, it effectively borrows money at zero and never has to repay the debt.
It’s thus not a surprise to see Berkshire’s various insurance companies – which includes Geico, Berkshire Reinsurance, and General Reinsurance – generate 24% of the conglomerate’s overall revenues last year, as per S&P Capital IQ’s data services.
Warren Buffett’s best acquisitions were often in pursuit of a float. He bought a company called Blue Chip Stamps in 1962. Blue Chip Stamps operated a loyalty program, wherein stores would pay the company to provide rewards to customers who would later redeem their stamps for products like furniture or silverware. Buffett would later use its float to finance the acquisition of See’s Candies.
American supermarket retailer Wal-Mart, a core Buffett holding, famously paid suppliers well after it received money from customers, allowing Sam Walton – the company’s founder – to open new Wal-Mart stores partially financed by his vendors. At any time, Wal-Mart is owed money for 4.5 days’ sales, but it takes as many as 41 days to pay its suppliers.
Foolish Bottom Line
Buffett’s ‘investing secrets’ aren’t really secrets at all. He has been open about sharing most of the sources of his knowledge, as well as the secret sauces behind some of his largest shareholdings.
It’s up to investors like us to spend a little time and effort to dig up such resources, which includes Buffett’s famous Berkshire annual shareholder letters, and pick the brains of an investing genius.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written Jordan Wathen and first published on fool.com. It has been edited for fool.sg