AUDIENCE MEMBER 00:00
Good morning, Mr. Buffett, Mr. Munger. My name is Jerry McLaughlin. I’m from San Mateo, California.
First, I just want to thank you for all the effort you put into the annual reports, the letters, and these conversations.
I’ve learned a lot, and they’re terrific, which is why I’m here from half a country away. (Applause)
You know, you’ve said that great companies are those that have an economic moat, and I understand that phrase to mean a sustainable competitive advantage.
Do businesses begin their lives with sustainable competitive advantages, or must that be developed over a very long time?
And then, what are the fundamental bases upon which you’ve seen companies successfully develop sustainable competitive advantages?
Of those, which do you think is the most enduring and which is the least?
WARREN BUFFETT 01:03
Well, sometimes they can develop it very quickly.
I mean, I would say that Microsoft, in terms of the operating system, you know, that was a relatively quick development. But that was an industry that was exploding, and things were changing very fast.
On the other hand, if you go back to See’s Candy, which started in 1921, you know, there was no way you could build a sustainable competitive advantage, at least that would be recognizable, in times measured shorter than decades.
I mean, you opened up one shop at a time, and nobody’d heard of you originally, and then a few people did.
And boxed chocolates were something that, you know, people may have bought once or twice a year for a holiday occasion or whatever.
So, you weren’t going to embed yourself in the minds of Californians in one or two or five years just because you were turning out, you know, outstanding box of chocolates.
So it depends on the way the industry itself is developing.
Walmart has done a fabulous job in a — an incredible job — in quite a short period of time. But even they, you know, they took it in the small towns, and they progressed along, and refined their techniques as they went.
But I would say that there could be things in new industries.
I would say with NetJets, we have a sustainable competitive advantage. And that’s an industry that was only originated in 1986 when Rich Santulli got the idea, and it was in its infancy — I mean total infancy — for a good many years after that.
But what he has built, and is building and fortifying, is that sustainable competitive advantage.
But it depends very much on the industry you’re in.
And I mean, Coca-Cola, 1886, Jacobs Pharmacy, Atlanta, Georgia, you know, John Pemberton came up with a product. And did he have a sustainable competitive advantage that day? If he did, he blew it because he sold the place for 2,000 bucks to Asa Candler.
He did — and it took decades, thousands of competitors over that time, and — you know, but they were painting one barn at a time and designing one Saturday Evening Post ad at a time, and all of that.
And — and pebbles — you know, around the world in World War II, General Eisenhower went to Mr. Woodruff and he said, “I want a Coke within the arm’s length of every American serviceman.” He said, “I want something to remind them of home.”
And so he built a lot of bottling plants for Coke around the world. And that was a huge impetus.
But that was, what, 60 years or so after the product was invented. So it takes — it takes a long time in certain kinds of products, but I could see certain areas of the world where a huge competitive advantage is built in a very short period of time.
I would say that probably, in terms of animated feature-length films, for example, Walt Disney did that.
And after “Snow White” and a few more, it took him a while until he could cash in on it, but he — it became Disney and nobody else in that field for quite a while, and fairly quickly.
CHARLIE MUNGER 04:25
Yeah, there are a lot of different models that create a sustainable competitive advantage. And there are also some models of where you can lose it very fast.
Just ask Arthur Andersen. That was a very good name in America not very long ago.
And I think it would be harder to lose the good name of Wrigley’s gum than the good name of Arthur Andersen.
I think there’s some perfectly remarkable competitive advantages that people have gotten over time.
And the great trouble with the investment process is that they’re so damned obvious that the stocks sell at very high prices.
WARREN BUFFETT 05:17
Snickers has been the number one candy bar for probably 30 or 40 years now.
CHARLIE MUNGER 05:22
Yeah, and —
WARREN BUFFETT 05:23
CHARLIE MUNGER 05:23
— in Russia, it turns out that everybody likes Snickers.
WARREN BUFFETT 05:26
What — how do you really knock it off?
You know, I mean, we make candy, we would love to displace Snickers, but it’s hard to think of ways to knock them from the number one spot.
I mean, my guess is that they’ll be number one in, you know, 10 years from now in candy bars, and the list doesn’t change much in that field because — if you think about the nature of how you make that choice as to what candy bar —
If you were chewing Spearmint chewing gum five years ago, and you buy a pack of some chewing gum today, it’s likely to be Spearmint.
I mean, there’s just things that you experiment a lot with, and there’re things that you don’t fool around with once you’re happy.
And, you know, you can understand that if you observe your own habits and people’s habits around you.
But there’s other — usually if something can gain competitive advantage very quickly, you have to worry about them losing it quickly, too.
I mean, when an industry is in flux, there are a lot of people that think they’re the survivors, or the ones that are going to prosper, where it turns out otherwise.
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"Usually if something can gain competitive advantage very quickly, you have to worry about them losing it quickly, too." ~Warren Buffett