In his 2007 letter to Berkshire Hathaway shareholders, CEO Warren Buffett, describes what type of businesses turn him on as an investor:
A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company being the low cost producer (GEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.
Buffett is credited as being the most successful investor of the 20th Century (a claim that seems pretty credible given that Berkshire Hathaway’s Compounded Annual Gain between 1965-2011 was 19.8 percent compared to the S&P 500’s 9.2 percent). So it is worth a few moments to contemplate the implications of some of his investment practices.
Buffett takes the long view for his investments. He is looking for a sustainable competitive advantage, not a quick win, and marketers would do well to do the same. There is no substitute for a meaningful positioning that the company can own for the long term. All too often I see new brands and campaigns launched with an eye to making it big quick by tapping into a transient fad or unsustainable claim. Often as not, it does not work, and when it does the returns are temporary. As Buffett states:
A moat that must be continuously rebuilt will eventually be no moat at all. (2007)
Buffett understands that markets are dynamic. Gains are made and then need to be held. A moat is a defensive structure not offensive. One of the most important, but undervalued, roles of marketing is to help protect a business, just as a moat protects a castle, by blunting competitive attacks and encouraging existing buyers to remain loyal. If you can hold share in a growing market you still make more money in the long run, and a loyal user base provides a great platform for new sorties of your own.
He recognizes that there are two types of moat: the low cost producer and the powerful brand. Of course, the two are not mutually exclusive. GEICO and Costco are both strong brands but their marketing is designed to encourage trial and generate volume. Coca-Cola and American Express are more focused on justifying their price premium over the competition. Marketers need to be very clear about which type of business they are trying to support because they demand different approaches.
Buffett does not make his investments without doing significant due diligence. Marketers need to do likewise. If you don’t understand your brand’s true purpose in people’s lives, you are unlikely to get good returns from your marketing investment. If you don’t test ideas and executions with the target audience but work solely on gut feel, you risk wasting your investment.
And on a final note, although his comments applied to management not marketing, Buffett suggests that good returns are “far more a function of what business boat you get into than it is of how effectively you row.” The success of a brand (and the marketing that supports it) is inherently bound up with the success of the business. Put it another way, it is tough to build a good moat when the castle is built on sand.
So what do you think of these principles? What other Buffett aphorisms might marketers want to take note of? Please share your thoughts.
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