An important classification of enterprises: businesses and franchises.
An economic franchise arises from a product or service that:
(1) is needed or desired; (2) is thought by its customers to have
no close substitute and; (3) is not subject to price regulation.
The existence of all three conditions will be demonstrated by a
company’s ability to regularly price its product or service
aggressively and thereby to earn high rates of return on capital.
Moreover, franchises can tolerate mis-management. Inept managers
may diminish a franchise’s profitability, but they cannot inflict
mortal damage.
In contrast, “a business” earns exceptional profits only if it
is the low-cost operator or if supply of its product or service is
tight. Tightness in supply usually does not last long. With
superior management, a company may maintain its status as a low-
cost operator for a much longer time, but even then unceasingly
faces the possibility of competitive attack. And a business, unlike
a franchise, can be killed by poor management.
Buffett identified the weakness of (media) franchises, which can’t be told by earnings immediately.
Buffet said they would continue to hold Cap Cities and Washington Pos.
For See’ Candy, California introduced a sales tax of 7%-8% on “snack food” including candies.
One secrete of low cost of funds is underwriting loss vs. float available.
Buffett also talked about the mistake in not making more money – omission.