Over the last couple of days, we have explored Microsoft’s moat and intrinsic value, and tried to discern why a successful investor who knows the company intimately might choose not to invest in it. We have concluded that having a truly wide moat likely requires a business to sell a product or service that directly caters to basic, enduring human preferences. If a business does not meet this necessary (though not sufficient) condition, it may be susceptible to a future paradigm shift in customer preferences.
One basic preference—the one that Warren Buffett most often uses as an example—is the enjoyment of a Coca Cola. The average person drinks 64 ounces of fluids per day. Coca Cola sells over a billion servings per day, all around the world. As Buffett muses:
“Cola has no taste memory. You can drink one of these [Coca Colas] at 9:00, 11:00, 3:00 in the afternoon, 5:00. The one at 5:00 will taste just as good to you as the one you drank earlier in the morning. You can’t do that with cream soda, root beer, orange, grape, you name it. All of those things accumulate on you. Most foods do. And beverages. You get sick of them after a while… There is no taste memory to Cola. And that means that you get people around the world that are heavy users, that will drink five a day… They’ll never do that with other products. So you get this incredible per capita consumption.”
So if each person could drink five Cokes a day, and the world population is approaching seven billion people, and growing, then it is quite likely that more servings of Coke will be served in ten years. A century’s worth of days show that the desire for Coca Cola is a basic, enduring preference. So desired, in fact, that thousands of irate fans bombarded the company with complaints when Coca Cola tried to better its taste (see the New Coke fiasco). That kind of event signals a business with a wide moat. Buffett continues:
“I can understand [Coca cola]… Anyone can understand [it]… It’s a simple business. It’s not an easy business. I don’t want a business that’s easy for competitors… Coke’s moat is wider than it was thirty years ago. You can’t see the moat day by day, but every time the infrastructure gets built in some country that isn’t yet profitable for Coke, but will be twenty years from now, the moat is widening a little bit… That’s the business that I’m looking for. Now what kind of businesses am I going to find like that… I’m going to find them in simple products. Because I’m not going to be able to figure out what the moat is going to look like for Oracle, or Lotus, or Microsoft ten years from now…
So I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they are going to be ten years from now. And if I can’t see where they are going to be ten years from now, I don’t want to buy them.”
A simple business is key for Buffett, which in our lights, means a business that sells a product or service that directly caters to basic, enduring preferences.
Disclosure: I, or persons whose accounts I manage, own shares of Berkshire Hathaway at the time of this writing.