Buffett’s Favorite Themes

Low Cost and Size Advantages 

In Buffett’s annual letters certain themes keep popping up. One is that Buffett likes a low cost competitive advantage and another is that he likes it when sheer size confers a competitive advantage. A low cost example is GEICO. A large size example is reinsurance and Berkshire’s ability to insure and reinsure large risks that no one else can — this leads to huge amounts of investable float and often extraordinary underwriting profits.

Capital Intensity 

Buffett also likes capital intensive businesses when large amounts of incremental invested capital can be deployed at attractive rates of return. Berkshire invests huge amounts of incremental capital in utilities and railroads. Businesses like these often face little competition or inferior competition because of regulatory entry barriers and because most companies are reluctant to make these kinds of large investments. Berkshire’s access to abundant capital, and its willingness to freely deploy this capital when return rates are attractive, give it a competitive advantage in capital intensive businesses.

Great, Hard to Copy Products 

Finally, Buffett likes companies with unique, hard to copy, great products. These qualities lead to strong brands, high customer satisfaction rates, and high customer loyalty. This theme seems to drive Buffett’s investments in Coca-Cola, See’s Candies, Apple, and American Express. In his letters Buffett regularly refers to customer satisfaction metrics because these numbers measure loyalty and brand value.

The author is not an investment advisor or CFA and readers should consult an investment advisor before buying or selling any publicly traded stock. The views expressed in this article are the author's personal opinions and should not be construed as investment advice.