Money making skil

        

          MONEY MAKING SKILL

                          By 

                Warren Buffett

                  Author’s Note

 Warren Buffett is commonly known as a longterm investor. But, if you have a look at the list of companies where Berkshire Hathaway, the company owned by Warren Buffett, has stakes, you would be surprised to find that it has 90% to 100% holdings in 67 other companies. These subsidiary companies are in major or controlling positions in different consumer markets and together they earn revenue of USD 109 billion (2017). Besides this, Berkshire Hathaway also has stakes ranging from 0.01% to 27.25% in 42 other companies. With all this, Berkshire Hathaway was making a net profit of USD 24.07 billion (2016) out of the total revenue of USD 223.60 billion. This also is a testimony to Warren Buffett’s great management acumen.

Thus, Warren Buffett is of the opinion that only those companies that are in a position to provide career advancement, job security and greatest opportunities for sustainable earnings can be the most suitable for ownership, investment and to work with. Warren Buffett considers such companies only as the ‘right businesses’ capable of providing ‘durable competitive advantage’, as their inherent economics work in their favour. But, the matter does not end here. Warren Buffett further subjects these ‘right businesses’ to serious financial analysis, techniques of which would be presented to you in detail in the second chapter.

the fact that Warren Buffett has been the greatest and the most successful investor of our time. But, this is not a full answer to the question. In fact, the most important point to understand in respect of Warren Buffett is that he has been an exceptionally successful ‘manager’ also.

I am sure, ‘Money Making Skills’ would not only provide an opportunity to the sensible readers to understand the ‘money skills’ of the greatest investor of the world but also help them in ensuring success in their personal and professional life by applying these management sutras. 

End of The Chapter

                             Chapter 1 

           Picking the Right Business 

Warren Buffett has not only been a long term investor but also an exceptional business manager. And in both of these ‘avatars’, the core mantra of Warren Buffett’s success has been picking the right business.

 Companies Having Durable Competitive Advantage

 Warren Buffett is of the opinion that only those companies that are in a position to provide career advancement, job security and greatest opportunities for sustainable earnings can be the most suitable for ownership, investment and to work with. Warren Buffett considers such companies only as the ‘right businesses’ capable of providing ‘durable competitive advantage’, as their inherent business economics work in their favour.

For example, companies like Coca Cola do not need to invest billions of dollars on continuous improvement in design or quality of their products and upgradation of their plant and machinery for the same to maintain their competitive edge. Thus, such companies accumulate enough cash to make them capable of taking over other companies to expand their market without resorting to borrowings or selling their shares of equity. On the other hand, take a look at the companies like General Motors. The designs of their products automobiles, keep changing almost every year and they have to spend billions of dollars every year on upgradation of their plant and machinery. If General Motors does not do that, it would not be able to compete with companies like Ford Motors and Toyota. This is the reason that, for meeting their capital expenditure requirements, all the companies in automobile industry have to resort to sale of bonds and shares of equity along with bank borrowings over and above their sales revenue.

It is clear that Warren considers only such companies the ’right companies’ that are capable of providing durable and competitive advantage. Such companies have three basic business models those who sell unique products, those who provide unique services and those who trade in low cost products and services that are part of common people’s needs and are always in heavy demand.

        Companies Selling Unique Products 

We may include Coca Cola Company, PepsiCo Inc., Philip Morris Marlboro, Budweiser (Anheuser Busch InBev Group), Gillette (Proctor & Gamble/ P & G), Hershey Company, Wrigley (Mars, Inc.), Kraft Foods Group, Marc & Co. and Johnson& Johnson etc. among the companies selling unique products. Here, we are providing brief details for unique products of some companies and their brand image.

Coca Cola Company: Coca Cola is considered to be the most successful brand of its kind. Everybody has heard the name ‘Coca Cola’ and it would be difficult to find a person who would not recognise its red trademark. ‘Forbes’ magazine had estimated the brand value of ‘Coca Cola’ at USD 58.5 billion with 4% annual growth and had placed it at the fourth position among the top 100 most valuable brands of the world in 2016. During that period, ‘Coca Cola’ brand alone had earned revenue of USD 21.9 billion whereas Coca Cola Company had spent only USD 4 billion to promote its brands including ‘Coca Cola’.

You may be surprised to know that Coca Cola was not the first to launch a coca based drink. Coca plants have been grown as a cash crop especially in Argentina, Bolivia, Colombia, Ecuador and Peru in western South America. Coca leaves are known around the world as a source of psychoactive alkaloid ‘cocaine’, though cocaine content in the same ranges from 0.25% to 0.77% only. Hence, chewing coca leaves or drinking coca tea does not induce feeling of excitement or depression like that caused by cocaine. The juice of coca leaves is being used as medicine for ages; however, it was in 1863 when French chemist Mariani discovered the chemical formula of coca wine. This wine launched in the market with brand name ‘Vin Mariani’ had become quite popular among the nobility. Nevertheless, the maximum cocaine content in this wine was just 10 mg per ounce and hence, this was very tasty but this induced addiction to drinking.

Candler founded the Coca Cola Company in 1892 and registered its trademark a year later. However, much before that, in 1885 itself, Candler had executed his expansion plans in all the states of the United Statesand sale of bottled Coca Cola had started in all major markets. Bottling plants had taken shape during initial years of the 20th century and in the next 100 years, Coca Cola had established itself as the most recognised brand in the world. It may be noted that the name of ‘cocaine’ had been already removed from Coca Cola much earlier and in 1893 itself, its competitor cold drink company the Pepsi Cola Company had been launched in New Bern (Craven County), North Carolina, an American state close to Georgia; this was constantly trying to compete with Coca Cola.

Still, Coca Cola had gone ahead expanding its market as the most successful brand. Why? Because ‘Coca Cola’ had made all possible efforts to sustain the market’s trust and belief in itself. Now, just have a look at the catch phrases used by Coca Cola in its advertisement campaigns ‘The Great National Temperance Drink’ (1906), ‘Six Million a Day’ (1925), ‘The Real Thing’ (1942), ‘What You Want is Coke’ (1952), ‘Coke is it!’ (1982), ‘Always Coca Cola’ (1993), etc.

Of course, the fact that it has always been able to linger in the mind and brain of customers through its incessant ad campaigns based on convincing tag lines has been the greatest strength of the Coca Cola brand. In 2014 alone, Coca Cola had spent a total amount of USD 3.50 billion for only this very brand on different ad campaigns and mass contact activities across the world. The Company had also spent the same USD 3.50 billion on its second biggest brand ‘Sprite’. Thus, the Coca Cola Company was the one spending the most on advertisements during 2015 among all the 100 most valuable brands.

In fact, 1963 proved to be the real year to define the Pepsi brand when the company launched its ‘Pepsi Generation’ ad campaign. This campaign was also effective because the advertisements were based on mental attitude instead of price, quality, taste etc. of the product. However, it was the ‘Pepsi Challenge’ ad campaign of 1975 that had played the pivotal role in establishing the Pepsi brand.

‘Forbes’ magazine had estimated the brand value of ‘Pepsi’ at USD 19.3 billion with annual growth of 3% and had placed the same at the 29th position among the ‘World’s Most Valuable Brands’ of 2016. During that period, the Pepsi brand alone had attained a revenue of USD 11.8 billion (USD 39.10 billion less than that of Coca Cola) whereas PepsiCo had spent USD 2.4 billion on promotion and publicity of all its brands including ‘Pepsi’. Thus, by spending just USD 16 million more on advertisement as compared to PepsiCo, the Coca Cola Company had managed to earn extra revenue of USD 39.10 billion on its primary brand. The Coca Cola Company had spent 6.8% of its brand revenue on advertisements whereas, PepsiCo had to spend 12.6%. Of course, there is no non alcoholic beverage brand in between Coca Cola and Pepsi.

PepsiCo Inc. PepsiCo is considered to be a differentiation brand. This is not as successful as Coca Cola. As such, there is no brand on this earth as successful as Coca Cola, but this also is a fact that it is the majestic position of ‘Coca Cola’ that makes ‘Pepsi’ special, as Pepsi is the only non alcoholic drink brand that has been able to retain its identity parallel to ‘Coca Cola’ for such a long time. You may clearly differentiate between ‘Coca Cola’ and ‘Pepsi’ and that is the reason it is called a differentiation brand.

It was in 1893 when University of Maryland School of Medicine educated pharmacist Caleb Davis Bradham had started selling the cold drink named as ‘Brad’s Drink’ from a soda fountain located at his pharmacy Bradham Drug Company in the city of New Bern situated at the confluence of Trent and Neuse rivers close to the sea beach of the south east American state of North Carolina. Some 489 miles away from this place, ‘Coca Cola’ had already taken birth seven years back in Atlanta (Georgia). Though both the drinks had contents of cola fruit, the two were different. While ‘Pepsin enzyme’ was used in Brad’s Drink, ‘Coca Cola’ had contents of ‘coca leaves’. Coca leaves in Coca Cola provided it a little bit of cocaine that triggered in the drinker a sense of energy boost associated with a feeling of exhilaration. On the other hand, pepsin enzyme in ‘Brad’s Drink’ improved digestion as well as provided a sense of energy boost.

  “Price is what you pay; value is what you get.” 

                                       By

   

                Warren Buffett