The Essential Book

As I mentioned before I read this book a couple of weeks ago





One could spend a lot of time talking about how good this book is as far as getting to know Buffett from all aspects. I think if your goal is to understand Buffett's thought process in the specific (whether it is on management, investing, or life in general) you should read this book first. I think if you read this book first and get a overveiw of everything, it will make reading the more specific books on Buffett easier to read from an understanding point.

What I want to briefly talk about today is one chapter of the book...Now it may seem odd that I am talking about one chapter in a book that currently has 299 chapters and over 1600 pages...but I am...

(now as I mentioned before I read the 1994 first edition of this book because that is what my library had...and I wanted to try before I buy...and believe me I will be buying the more recent edition just as soon as I finsih witht he books I am reading now...but I digress)

I believe the most recent edition still has the chapter I am going to talk about...it is I beleive Chapyter 181 pages 1143-1145...

in the 1994 edition (1st ed.) there is a chapter called "Generics" it is Chapter 32.

Now I can say without a doubt that I would be willing to pay the $35 for the whole 1600 page book just to get the 2 pages that this chapter covered. Heck I probably would paid more if I had to...

What you ask is so wonderful about two pages of a 16000 page book? what is so wonderful about two simple pages that I would be willig to spend $35 or $50 or possibly more...lean close and I will tell you...

I have found all that I need to know about investing...seriously.

those two pages discuss a response by Buffett to a sharehilder question at the 1993 annual meeting...the quesiton was in regards to "generics" being a threat to name brands...

and in those two pages Buffett sets forth a thought process that might take you one two or more years and thousands of dollars in school to learn.

basically Buffett says that no matter how strong your brand is if the generic can offer an adequate alternative at a signficant lower cost than what your brand needs to sell at to be succesful...your brand...your moat...is at risk.

what does that mean to me?

well lets say Coke sells for $5 for a 20 oz serving...and the local no name cola sells for .50 cents for a 20 oz serving...

now many would say "who would pay $5 for a coke" and I would say we all would...think about the last time you went to a sporting event..how much was the coke? well I went to the Dodogers/Cubs came wed and my coke was $4.50...did I think it was worth that..no but I wanted a cola...if there had been an alternative selling at the game for .50 cents would I have bought it..yes...because for most fmailies of four the difference between Coke and genric is not worth $18 bucks...

now lets take it to the supermarket...Coke sells for a few cents more than the genric..not ten times more...so coke might sell for .60 cents...over the genrics .50 cents...most people will go for the brand for .10 cents more...

and Coke's business model is highly profitable on selling servings for a few cents more than the generics...not ten times more...

but what if coke had to always sell coke for $5 to be succesful...and not be able to exclude competition like they do at the ballpark...than would they be in danger from generics?...

so no matter how storng a brand is...if the brand's business model depends on people willing to pay a sinficant premium over that of a genric product which can offer a adequate replacement at a signficant cost savings...you really have no brand...it is that simple...

I must qualify what I say by stating that I do not mean to imply that the secret to succesful investing can be summed up in two pages...investing does require lots of hard work and lots of time reading....and learning...but what I am talking about is an overiding framework and thought procees on thinking about what companies to invest in..

what I am saying is that if you take the two pages I am talking about...copy them down...stick them above the wall where you do your investing...and read the two pages before you click on a buy order....you probably will end up doing all right over the next 20 years with your stock picks...(assuming you have done the hard work of reading about the company)...

to sum it up...for me finding companies that have a strong brand that cannot both be 1) adequately replaced at 2) a signficant cost savings...is what I am trying to do...

of cousrse there are other ways to invest, i.e., truly undervalued companies, special situations...and I am interested in them...

but what I am talking about here is that part of my growing thought process that whats to find truly great companies that should be here 5, 10, 20 years down the road...and figuring out whether they are over or under price comes later...

So all I can say is buy or get the book and read the chapter.

Steven