LESSON TWO

WHAT MAKES A GOOD COMPANY

MOATS THAT PROTECT THE CASTLE

“A truly great business must have an enduring moat that protects excellent returns on invested capital.”

A moat protects the castle against invaders and pillagers. The castle is the company (Geico, for example); the invaders and pillagers are the market competitors (Progressive).

What creates a moat:

  • Low-cost producer

  • Franchise service

  • Position in consumer’s mind (loyalty)

  • Technological advantage

CUSTOMER (OR BRAND) LOYALTY

Good customer loyalty helps a company retain customers and protect itself against competition. Over 55% of consumers are loyal to a brand because they love the product.

DEDICATED MANAGEMENT TEAM

One way you can tell a company is a good business is if there’s a long-term dedicated management team in it for more than just the money.

Here’s what Warren Buffett says about good, great and gruesome businesses—and the danger of copycats.

BUFFETT VALUES TRANSPARENCY IN COMPANIES, PARTICULARLY THOSE THAT ADMIT AND LEARN FROM THEIR MISTAKES.

Why? A willingness to acknowledge and address issues can lead to improved performance in the long run.

TAKEAWAY CONCEPTS

Moats protect returns on invested capital • customer loyalty • dedicated leadership team • corporate transparency • learning from mistakes

HELPFUL
DEFINITIONS

  • Zombie companies earn just enough money to continue operating and meet overhead but have no excess capital to invest to spur growth. Zombie companies are typically just one event—market disruption or a poor quarter performance—away from insolvency or a bailout.

    In the United States, between 5%–10% of all companies are zombie companies. Examples of zombie companies, according to The Triangle, include WeWork, a provider of coworking spaces, cruise lines like Carnival Cruise Line and GameStop.