Warren Buffett as Your Small Business Consultant

Building a Small Business That Warren Buffett Would Love - Available at Amazon.com

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-style investment and one that is not, ask yourself this question: “in twenty years is it more likely that consumers will be drinking Coke or using the iPhone?” This question is not designed to play favorites. It is meant to illustrate the guts of the Warren Buffett investment methodology and if you can understand the reasoning behind the answer, you will be well on your way to building a small business that Warren Buffett would love. In twenty years, is it more likely that consumers will be drinking Coke or using the iPhone? If the moon were made of spare ribs, would you eat it?

I choose Coke … why?

First, some prima facie answers

1. The company has been brand building since 1886.[i]
2. A can, bottle or fountain of Coke is always within about a 100 yard reach of every human being on the planet regardless of location.
3. The company had $35 billion in sales last year.[ii]
4. Every time I go to the movies, I see a Coke commercial.[1]

And some financial answers that Warren Buffett loves:

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

The answer to our question and subsequent analysis is not a comment on the viability of Apple or a statement on the quality of the product. Apple is a highly innovative company with outstanding, mind-numbing products. The intention of the answer is to place an emphasis on the predictability of a company. No one can predict the future but if an attempt must be made (e.g. we are building a business that needs to be successful in the future) is it more likely that an accurate prediction can be made based on a rock-solid, consistent track-record or on one that is questionable? Not that Apple does not have a strong track record, but guess what, Coke’s is stronger. Plus, you are already taking the bet. It’s a moot point to say I wouldn’t take either one since you are already putting your chips on the table whether by stock purchase, rental property investment or building a small business that Warren Buffett would love. Since you are joining the party, make sure it is a fun one by taking the surer bet.

Many will argue that past results are not an indicator of future performance, but in the case of Warren Buffett’s track record, much of his success can be attributed to a “mold” of key historic attributes. These attributes when modeled after in a small business can lead to great results.

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[1] Amazingly enough, although Polar Bears can swim up to 100 miles at a stretch, they are very awkward, lumbering walkers and must kill their prey by resting silently outside of breathing holes in the ice. Even more amazing is the fact that they have enough dexterity in their goofy paws to twist off bottle caps.

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[i] Pendergrast, Mark. For God Country and Coca-Cola. 2^nd ed. New York: Basic Books, 2000. Print

[ii] Coca Cola’s Income Statement. Retrieved April 17th, 2011, from Morningstar.com http://financials.morningstar.com/income-statement/is.html?t=KO

[iii] Coca Cola’s Financial Statements. Retrieved May 3rd, 2011, from Morningstar.com http://financials.morningstar.com/income-statement/is.html?t=KO

[iv] Food Timeline. Retrieved May 3^rd, 2011 from http://www.foodtimeline.org/foodfaq5.html

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