The great, the good, and the gruesome

Warren Buffett, one of the most successful investors of all time, is well known for imparting investment wisdom through his annual letters to shareholders. These insights have remained relevant despite decades of market ups and downs. This lasting relevance is why we revisit his 2007 letter, in which Buffett discusses the kinds of businesses he favours and those he avoids. Buffett begins by outlining the criteria he (and his longtime business partner, the late Charlie Munger) uses to select investments. He starts by saying, "Charlie and I look for companies that have a) a business we understand; b) favourable long-term economics; c) able and trustworthy management; and d) a sensible price tag." However, this is just the starting point. He further classifies companies into three broad categories, which form the crux of his letter: great, good, and gruesome businesses. A great business According to Buffett, a great business is one with a competitive advantage, or "moat." He explains, "A truly great business must have an enduring 'moat' that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business 'castle' that is earning high returns. Therefore, a formidable barrier such as a company's being the low-cost producer (GEICO, Costco) or possessing a powerful worldwide brand (Coca-Cola, Gillette, American

This article was originally published on September 01, 2024.