Warren Buffett: Spotting A Business with A Long-Lasting Competitive Edge

During the 2017 Berkshire Hathaway Annual Meeting, Warren Buffett explains how Berkshire Hathaway identifies businesses to acquire, emphasizing long-term competitive advantage, trusted management, and cultural fit.

He recalls purchasing See’s Candy in 1972, highlighting their confidence in its lasting appeal despite higher prices. This confidence has led to significant profits over time. Buffett humorously notes that while they were “young and ignorant” when making the purchase, their judgment was correct.

He concludes by expressing the desire to find more businesses like See’s Candy, but on a larger scale, underscoring the importance of quality and foresight in their investment strategy.

Here’s an except from the meeting:

WARREN BUFFETT: Well, I’m not sure I can define it exactly in the terms you would like, but we sort of know it when we see it. It would tend to be a business that, for one reason or another, we can look out five, ten, or twenty years and decide that the competitive advantage it has at present would last over that period.

It would have a trusted manager who would not only fit into the Berkshire culture but would be eager to join the Berkshire culture. Then it would be a matter of price.

Essentially, when we buy a business, we’re laying out a lot of money now based on what we think that business will deliver over time. The higher the certainty with which we make that prediction, the better we feel about it.

You can go back to the first — it wasn’t the first outstanding business we bought, but it was kind of a watershed event — which was a relatively small company, See’s Candy. The question when we looked at See’s Candy in 1972 was, would people still want to be eating and giving away that candy in preference to other candies?

It wouldn’t be a question of people buying candy for the low bid. We had a manager we liked very much. We bought a business for $25 million, net of cash, and it was earning about $4 million pretax then. We must be getting close to $2 billion pretax taken out of it. But it was only because we felt that people would not be buying necessarily a lower-price candy.

I mean, it does not work very well if you go to your wife or your girlfriend on Valentine’s Day — I hope they’re the same person — (laughter) — and say, “Here’s a box of candy, honey. I took the low bid.” It loses a little as you go through that speech.

We made a judgment about See’s Candy that it would be special, probably not in the year 2017, but we certainly thought it would be special in 1982 and 1992. Fortunately, we were right. We’re looking for more See’s Candies, only a lot bigger. Charlie?

CHARLIE MUNGER: Yeah, well, it’s also true that we were young and ignorant then.

WARREN BUFFETT: Now we’re old and ignorant. Yeah. (Laughter)

You can watch the entire meeting here: