The complete title of Marry Buffett’s book is Warren Buffett and the Interpretation of Financial Statements: The Search for the Company with a Durable Competitive Advantage. The title contains our favorite subject: Competitive Advantage, one of the most important but rarest topics in investing.
Marry Buffett’s Book About
In The Seek of Wonderful Company
Without going nonsense, Mary and David offer the purpose of the book since the beginning of its chapter. They are:
- How investors can identify companies with a durable competitive advantage.
- How to make valuation from point 1.
There are only a few investing books that cover the competitive advantage of the business. There are a few investing books that talk about valuation. Therefore, a book that talks about valuation after discussing the competitive advantage are a masterpiece.
The mindset of the book is the same as our cover about intrinsic value, There, we tell that the valuation comes from the durability of the business.
Another good point from Marry is that Warren Buffett shift his paradigm from looking for hated, oversold, and undervalued businesses to picking the business with a durable competitive advantage.
At the heart of the book, Marry tries to recognize the competitiveness of business by looking at its financial statement.
Now we need to talk.
Critics on Marry Buffett’s Book
It just a Supplement
To criticize Mary’s book is such unethical behavior. Because I know that Mary understands investing more than I do (Also, her last name is Buffett). The use of the word critics is not to tell that Mary’s perspective is wrong, but rather, to give complete insight than what has been presented in the book.
I myself recommend this book in your arsenal. You can search it on Amazon and we don’t get a commission if you buy one. Personally, this is one of the practical books out there. Not much talk about psychological nonsense. This book brings you into real practice.
The early chapter discusses Wall Street and the process of Warren Buffett’s investing mindset transformation. It is a really good and inspiring story to complete your investing puzzle. You could enjoy that by reading the book. We jump to a critical issue discussed in chapter 10.
Gross Profit Margin
Marry Buffett Book Chapter 10 Say That It Should Be Really High
This chapter deal with Gross Profit Margin. Intuitively, you don’t have to become Oracle of Omaha to know that the higher Gross profit Margin (GPM) is better. Even High School students could comprehend it.
Mary takes Coca-Cola (60%), Moody’s (73%) Burlington Northern Santa Fe (61%), Wriggle (51%) as examples of how gross profit margin (GPM) should be. Moreover, she takes United Airlines, General Motors, US Steel, Goodyear Tyre as an opposite polar examples.
Now we begin to see the (little) problem.
First, Buffett ever holds airlines stock, United Airlines include. Even when the GPM is low. Buffett also invests in Banking, Bank of America, JP Morgan – all operate in low GPM. What about Chevron? Warren Buffett has it. Every commodity company runs at a low margin when the oil prices crash.
- Warren Buffett invest in major US airlines in 2016.
- Warren Buffett buy Chevron in 2020
- Warren Buffett buy JP Morgan in 2018
This perspective also doesn’t converge with Berkshire Hathaway itself.
Insurance companies, altogether with energy (Berkshire Hathaway Energy) and transportation (Burlington Northern Santa Fe), contribute most of Berkshire’s earnings and cash flow. Two (Insurance and Berkshire Energy) of that three-run at low GPM.
- Berkshire Hathaway take over GEICO in 1996.
- Berkshire Hathaway buy National Indemnity Company and National Fire and Marin in 1967.
Intangible, Low-Cost Producer, Network Effect
It is Not Only About Brand
In our analysis, the high GPM could be reached if the company has some intangible asset advantage, especially brand perception. So, it is not surprising if Mary mentions Coca-Cola as an example. Other good ones are Apple, Rolex, Tiffany, or Disney (for Disneyland and the movie).
When comes to the brand, customer perception is more important than functionality.
But it doesn’t mean that the low GPM figure always implies an absence of durable competitive advantage.
Take a look at Visa, MasterCard, and American Express (Warren Buffett own the stake in these three guys). If durable competitive advantage means that a company could grip its market share while preserving earning level, these three are absolute examples. And these three operate at a low level of GPM.
The durability of the business comes from its network effect. It connected with a massive number of parties thus could offer competitive prices for customers. As a result, no other could compete with them in terms of scale, price, and speed. This is the definition of impenetrable business.
Or if we take the banking sector as an example against the theorem “low GPM imply the non-existence of business durability”, we know that this kind of company builds its durability through switching cost. Since the bank account is connected to another important account, make it is inconvenient for customers to migrate.
Fantastic Business and Where You Can Find Them
- Mary has created an excellent book, but in the case of GPM, it doesn’t always work like that. A company with low-level GPM somehow still has a chance of having a durable competitive advantage. This case is more apparent for companies with switching cost advantage and network effect advantage.
- If we refer to Buffet for finding a company with a durable competitive advantage, we suggest you seek a company with monopolistic characteristics. Try to read our post focus on this issue. Shortly speaking, trio Visa, Mastercard, Amex, are monopolies. Quartet airlines, Delta, American, are monopolies.
- Book is good for building basic knowledge and once again we recommend you to buy this one, but never forget to stay relevant, keep open-minded, and keep learning.
See you in part 2.