Last week's Berkshire Hathaway annual letter provides investors with better insights into what makes for a great investment than any business school could hope to teach. Whether you're just getting started buying stocks or are a market-hardened veteran, Berkshire's annual letter is mandatory reading material. For a rundown of Warren Buffett's most salient points, take a look at my colleague Morgan Housel's excellent article.
I have my own favorite piece of wisdom out of this year's letter: Buffett's description of how insurer GEICO has grown to be the third-largest auto insurer in the U.S., with a market share of 8.8%. The crucial nugget of information is where Buffett describes how GEICO pulled off this feat: "get the policyholder’s business by deserving his business." As it turns out, saving customers "15% or more on car insurance" has paid off big time.
Deserving a customer's business is a concept so simple it seems obvious, but the unfortunate reality is that many businesses have their priorities backward and focus more on how they can extract every dollar from their customers than how they can provide as much value as they can. The types of enduring franchise businesses that Buffett loves often buck that short-term mindset and deliver their customers great value, ensuring that shareholders will build tremendous wealth over multidecade periods of time.
Can I find the next great franchise business by thinking about which companies deserve my business? I think I can, and I started by asking myself "Who am I happy to pay money to for their products?" Interestingly, the list I came up with is full of companies with great brands that have customers like me making repeat purchases.
I have been a Netflix
Beer drinkers across the country should send Boston Beer
The sales guy in my neighborhood running store told me that "cotton is rotten," and after trying out my first pair of real running socks I finally understood all the hype around Under Armour's
Every single one of these companies deserves my money. I am happy to pay them for the product or service they provide and expect to continue to do so for a very long time. I don't think it's a coincidence that each of these companies is led by a passionate CEO wholly committed to providing high-quality products to its customers. That leads to a virtuous cycle where the consumer keeps coming back for more and that's good for both the customer and shareholders.
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