There are two types of businesses.
One exceptional.
And one not.
It’s easy to spot the difference.
But the exceptional are rare.
The unexceptional businesses sell commodity-type products or services,
which have lots of price competition,
low profit margins,
low returns on equity,
and volatile earnings.
Think the auto manufacturers,
who historically see repetitive cycles of boom and bust.
In the boom years,
demand outstrips supplies,
creating huge profit margins.
In the bust years,
low demand kills their profits,
and their fixed costs end up killing them.
After all,
they have no choice but to spend a fortune
on research and development,
on retooling,
and reeducating employees.
And since they often lose money,
they must carry large amounts of debt
just to stay in the game.
Exceptional businesses offer a different experience.
They have little price competition,
high profit margins,
high returns on equity,
and consistent earnings.
Their products or services hardly change,
which means they are free from having to spend a fortune
on R&D, retooling, or reeducating.
And they often carry little to no debt.
And they often carry little to no debt.
With all of the cash they generate,
they buy back shares or invest in new businesses,
which further enriches owners.
It’s clear to me which side of the business world
I want to reside.
(Inspired by or directly quoted from essays No. 24, No. 30, and No. 39 in The New Tao of Warren Buffett by Mary Buffet and David Clark.)