Three Brands to Invest Like Buffett
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the most important things Warren Buffett analyzes when selecting the best companies to invest in is the power of a moat, meaning the strength of the company’s competitive advantage. Strong moats protect companies and their investors from the pressure of competition, and that's something tremendously valuable in the long term.
As long as a company is producing valuable goods, and it has a moat to defend itself from other businesses trying to capture a piece of its profitability, investors know they are buying an asset that increases in value every day. Maybe it's not necessarily the highest grower around, or the cheapest stock you can find, but there is plenty of comfort in knowing that time plays on your side -- in Buffett's own words: Time is the friend of the wonderful company, and the enemy of the mediocre.
Besides, there is more to buying wide moat stocks than return potential; peace of mind can be even more valuable. In times of finical instability and volatile markets, these kind of companies are good instruments to hold or even increase positions when economic turbulence produces buying opportunities.
There are different ways in which moats can be generated and sustained, but one of the most effective and easy to identify is the power of a differentiated brand. Coca-Cola (NYSE: KO) owns the most valuable brand in the world, according to Interbrand, and that's one of the main reasons the company is the main holding in Berkshire Hathaway's (NYSE: BRK-B) (NYSE: BRK-A) portfolio. Listening to Buffett again: If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done.
Coke has been a holding of Berkshire for decades, and Buffett has expressed his love for the company on many occasions. But a more recent move that may be very interesting to follow is the purchase of IBM (NYSE: IBM) last year. Buffett took a big bet in this position; its weight in the Berkshire portfolio is almost 18% and it competes closely for the second and third place with another long-term favorite of Buffett, Wells Fargo.
It was quite a surprise when Buffett announced this position -- the Oracle of Omaha is known for staying away from the technology sector through his career, and Buffett himself has admitted that he doesn´t have much knowledge or experience in industries like software and technology consulting. However, Buffett knows a powerful brand when he sees one and IBM is one of the most valuable brands in the world. Actually, according to Interbrand it’s precisely the second most valuable after Coca-Cola.
Another classical Buffett holding with a tremendous brand power is Procter & Gamble (NYSE: PG), which owns 50 leadership brands that are some of the world best known household names. Within those 50 brands, 24 of them generate more than $1 billion in annual sales. Its product portfolio has an indisputable global strength, and that explains why this consumer staples giant has been able to increase dividends for 55 consecutive years regardless of economic conditions or financial uncertainty.
Investing like Buffett, arguably the most successful long-term investor of all times doesn’t need to be complicated. Simply choosing companies with unbeatable brand power is a very effective starting point, and something that can be done by beginning investors without much sophisticated knowledge.
acardenal owns shares of IBM. The Motley Fool owns shares of Berkshire Hathaway, International Business Machines, and The Coca-Cola Company. Motley Fool newsletter services recommend Berkshire Hathaway, The Coca-Cola Company, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.