Warren Buffett as Your Small Business Consultant

He doesn’t gamble in the stock market; he doesn’t take short term, technical positions betting on immediate spikes or dips. He is not a buy and hold mutual fund investor. Warren Buffett is a long haul business investor who takes partial if not whole positions in companies with favorable, underlying economics, good management and consumer monopolies.

To draw a quick distinction between a Buffett investment and a Buffett non-investment, ask yourself this question: “if I had to place money on whether consumers will still be drinking Coke or using the iPhone in 20 years, which one would I choose?” This is not a question to make you choose teams. It is meant to be a straight-forward logical question and is really the cornerstone in understanding how Warren Buffett invests. Pretend that one million dollars is on the line. If you answer the question correctly you gain one million dollars. If you answer incorrectly, you lose one million dollars. I would wager that now, even die-hard Apple fans are capitulating.

This analysis is not a comment on the viability of Apple or a statement on the quality of their product. It is simply an examination of the predictability of the nature of the company. Despite the input of raving Apple fans and the over 40 million iPhone users across the globe, why is Coke a surer bet than Apple? Why is Coke a more predictable company?

A short list:

First, some prima facie answers:

1) The company has been around since 1886.

2) Every time I go to the movies I have to go through at least one Coke commercial.

3) Whether by restaurant, convenience store or vending machine a Coke seems to always be within a 100 yard reach.

4) I have a Coke ornament on my Christmas tree.

And some financial answers:

1. Outside of a few blips on the radar, the company has had increasing, steady earnings over the past 10 years.

2. The earnings per share have grown at an approximate rate of 13.65% over the same period.

3. The return on equity has averaged 32% over the past 10 years.

4. The company can pay off its long term debt in about one year strictly from earnings.

5. The company can adjust its prices to inflation: In 1950 a bottle of Coke cost a nickel. Today, depending on location, a Coke will cost you anywhere from one to two dollars.

If you can start thinking in this mode and identify companies that in 20 years will most likely still be churning out underwear (Fruit of the Loom), satisfying the world’s chocolate fix (Hershey’s), filling out your 1040 (H and R Block), fixing a cold with chicken noodle (Campbell’s), then you are well on your way to thinking like Warren Buffett and building a business that he would want to buy, maybe.