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Rupert Hargreaves
Rupert Hargreaves
Articles (626)  | Author's Website |

Warren Buffett: What Makes a Moat

The Oracle of Omaha on 'share of mind'

October 12, 2018 | About:

Without a doubt, Warren Buffett (Trades, Portfolio)'s most impressive quality is his ability to pick out the market's best stocks.

How he does is it has been the focus of many books and research papers over the years. Everyone wants to know his secret, hoping they can replicate his success by distilling the Oracle of Omaha's strategy down to a few easy steps.

Unfortunately, it is not that easy. If it was, everyone would be a successful investor. That being said, simplicity is at the core of Buffett's strategy. He only invests in simple businesses that he understands and knows will remain relevant over the long term.

In a question-and-answer session with MBA Students at Florida University in 1998, Buffett outlined his strategy perfectly. When asked to define what he looks for before investing in a business, he responded that one of the most desirable qualities a company can have is "share of mind." Here's the full quote:

"Thirty years ago, Eastman Kodak’s (NYSE:KODK) moat was just as wide as Coca-Cola’s (NYSE:KO) moat. I mean if you were going to take a picture of your six-month old baby and you want to look at that picture 20 years from now or 50 years from now...they are promising you that the picture you take today is going to be terrific 20 to 50 years from now about something that is very important to you. Well, Kodak had that in spades 30 years ago, they owned that. They had what I call share of mind. Forget about share of market, share of mind. They had something—that little yellow box—that said Kodak is the best. That is priceless."

Buffett went on to say he avoids complex businesses because it is difficult to figure out what their moat is like and how sustainable it is. They might have a "share of mind," but it is difficult to tell:

"Now what kind of businesses am I going to find like that? Well, I am going to find them in simple products because I am not going to be able to figure what the moat is going to look like for Oracle (NYSE:ORCL), Lotus or Microsoft (NASDAQ:MSFT) 10 years from now. Gates is the best businessman I have ever run into and they have a hell of a position, but I really don’t know what that business is going to look like 10 years from now...I know what the chewing business will look like 10 years from now. The Internet is not going to change how we chew gum and nothing much else is going to change how we chew gum. There will lots of new products. Is Spearmint or Juicy Fruit going to evaporate? It isn’t going to happen. You give me a billion dollars and tell me to go into the chewing gum business and try to make a real dent in Wrigley’s. I can’t do it."

Simple businesses that are easy to understand that have a "share of mind." These are the qualities Buffett is looking for in an investment. He wants simple businesses because he wants to be able to try and figure out where each company will be 10 years from now.

Buffett only makes an investment if he thinks the company he is buying will be around for many years, churning out returns for investors and letting compounding do its work. If the business looks like it won't be around a decade from now, or is too difficult to understand, he's not interested.

"So I want a simple business, easy to understand, great economics now, honest and able management, and then I can see about in a general way where they will be 10 years from now. If I can’t see where they will be 10 years from now, I don’t want to buy it."

Disclosure: The author owns no stocks mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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