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Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) didn't grow to become a $290 billion company without some help. Having Warren Buffett at the helm helped a lot.
As Chairman of Berkshire, Buffett's made several outstanding investments in industries ranging from financial services to consumer products. And although these investments differed in some ways, they all shared surprising similarities.
1. Brands that have pricing power
Warren Buffett looks for companies that can survive and thrive over decades, and even centuries. One common attribute of Buffett's best portfolio companies is pricing power -- the ability to pass on price increases to consumers.
See's Candies is an excellent example. Berkshire Hathaway purchased the company for $25 million in 1972. Today, it earns $80 million per year. See's Candies has not grown tremendously -- it's still a West Coast confectioner -- but it has raised prices. In fact, Buffett's raised prices every single year for 41 years since he acquired the company.
Other Berkshire mainstays have this attribute. Coca-Cola prices have only gone up over time. In a similar vein, automobile values have gone up over history, and so have the insurance premiums Geico charges its customers. Prices for consumer goods have only risen, driving merchant processing volume at American Express.
When a brand has pricing power, it benefits from the consistent, perpetual tailwinds of inflation.
2. Brands that have staying power
It's one thing to build a good company. It's another to build a great company -- a company that can live on forever.
Warren Buffett often talks of his great companies. Gillette, for instance, is a company with gross margins in excess of 40% that sells a product (razors) that will always be in demand. Mars owns the Snickers brand, the top candy bar in the world for 40 years straight. And of course there's ol' reliable, Coca-Cola, which has been the leading cola ever since the birth of the lovely carbonated beverage.
3. Interest-free financing
If a loan never has to be repaid, is it really a loan at all?
Warren Buffett understands this well. Insurance companies generate what is called a float -- money received in premiums that will be paid out on some unknown date in the future. If a company continuously creates a float, which only grows in size year after year, it effectively borrows money at zero and never has to repay the debt.
Warren Buffett's best acquisitions were often in pursuit of a float. He bought a company called Blue Chip Stamps in 1962. Blue Chip Stamps operated a loyalty program, wherein stores would pay the company to provide rewards to customers who would later redeem their stamps for products like furniture or silverware. Buffett would later use its float to finance the acquisition of See's Candies.
Wal-Mart famously paid suppliers well after it received money from customers, allowing Sam Walton to open new Wal-Mart stores partially financed by his vendors. (At any time, Wal-Mart is owed money for 4.5 days' sales, but it takes as many as 41 days to pay its suppliers. Wal-Mart is a core Buffett holding.)
