1996 U.N.C. Lecture Series continued...
From your point of view, what's the difference between investing in the whole company like See's Candy, or a piece of the company like The Coca Cola Company?
Warren Buffett does not believe there to be a difference in the two. The same considerations and due diligence should be made if one is seeking to invest in stock or purchase companies completely. However, the two main advantages of owning businesses Buffett highlights are:
- If you buy the entire company, you have the ability to change the entire management, if necessary. However, he emphasizes that he would not be buying the company if he had the change the management anyway. In previous lectures, we know how important management is to Buffett, therefore if management was not capable and honest, the company would not be an investment worthy of making. This is because he many not know anything of running the business himself. However, you do have the option of changing management at some point in time if you think this is necessary for the future success of the company.
- You would have the ability to take the capital of the company and allocate it appropriately. As he does with his holding company of 70+ businesses, all managers send him excess capital, and he allocates capital as he sees fit towards marketable securities or outright purchasing of companies.
Talk about banking consolidation.
"I do not see economies of scale beyond certain points. There is always an advantage to being dominant in a market, but I am not sure whether you have got $200 billion spread across the country and 15% market shares, that you are going to have a better business than someone that has 30% market share in Rockford, Illinois. We used to own a bank in Rockford, Illinois which made 2% on assets after tax and was conservative in every respect but that bank would earn less money as part of a larger institution. So, I don't see great advantages to shareholders in terms of major expansions of banks. ...The acquiring bank's shareholders will be better off in most situations than the acquirer's shareholders."
I was wondering if you comment on your perspective of investments outside of the U.S. and in particular, address how you would hedge currency risk?
" We like companies that can do well in international markets obviously, particularly where they are largely untapped. Would be buy Coca Cola, if instead of being domicile in Atlanta, it was domicile in London or Amsterdam or someplace? The answer is obviously yes. Would I like it just as well? Probably a tiny notch less. Well, there may be nuances of corporate structures or tax factors or attitudes towards capitalists that I do not quite understand as well. So I prefer, by a small margin to many countries and by a large margin to other countries, U.S. domicile operations. But I also prefer companies that earn high returns on capital. We will look any place to find a good business, and I find it easier to find them in the U.S. because I understand the economy a lot better and I understand how they would function in the future than in some other country, but I don't rule them out."
I agree with this as well. A great way to play currencies is to invest in large U.S. corporations that earn a great share of their earnings outside of the U.S. Buffett mentions a couple examples of Coca Cola and Gillette. Other examples include Johnson and Johnson, Proctor and Gamble (acquired Gillette) and Nike. These are all companies in his portfolio.
What companies do you perceive as having franchise value right now?
Warren Buffett defines it using the idea that will people be willing to pay extra for a particular product versus a cheaper alternative. Does your product create that 'share of mind' in customers head? Are they willing to go through the extra effort to purchase your product than settle for another? He then refers to franchise value as a moat around your business. These questions must be asked. How big is the moat and how durable is that moat? The moat could be based on patents, research, pricing etc. You will need a moat in business to prevent a guy from coming along and taking market share.
See the beginning of the final video for the remaining response to this question.