by William Smead, Smead Capital Management
We are spending the five weeks leading up to the Berkshire Hathaway Annual Meeting focusing on investment keys which are important to both Warren Buffett and Smead Capital Management. This week our focus is on owning “high quality” businesses.
Warren Buffett has said many times that Charlie Munger rearranged his thinking by convincing him that “it is better to buy a wonderful company at a fair price, than a fair company at a wonderful price”. Whether a business is wonderful in the eyes of Mr. Buffett is determined by qualitative and quantitative factors. In other words, it is both art and science.
A couple of fast tests about how good a business is. First question is “how long does the management have to think before they decide to raise prices?” You’re looking at marvelous business when you look in the mirror and say “mirror, mirror on the wall, how much should I charge for Coke this fall?” [And the mirror replies, “More.”] That’s a great business.
When you say, like we used to in the textile business, when you get down on your knees, call in all the priests, rabbis, and everyone else, [and say] “just another half cent a yard.” Then you get up and they say “We won’t pay it.” It’s just night and day.
I mean, if you walk into a drugstore, and you say “I’d like a Hershey bar” and the man says “I don’t have any Hershey bars, but I’ve got this unmarked chocolate bar, and it’s a nickel cheaper than a Hershey bar” you just go across the street and buy a Hershey bar. That is a good business.
Buffett to the Notre Dame Faculty 1990
Source: Warren Buffett – Full Transcripts, Lecture to Faculty, Notre Dame (page 22 of source)