Invest in companies with share of mind the Warren Buffett way

Now check if your responses were the following: Gillette, Nescafe, Horlicks, Maggi, Fevicol, Castrol, Royal Enfield.

If your responses were indeed these, that's because these companies own the top share of your mind. Even if you came up with a different company, that name has your share of mind. In this article, we look at why Buffett searches out companies with the top share of mind of consumers and how we can improve our own stock-search strategy using this approach.

Buffett loves investing in companies that own the top share of mind in their industries. He owns shares in Coke, Apple, American Express, Heinz, See's Candies and Geico, among others. The common theme running across these companies is the top share of mind each commands among its consumers.

Why Buffett likes companies with top share of mind
Companies with top share of mind are able to pull such customers in who want and buy only those products and services they know very well and are comfortable with. Here is Buffett explaining what share of mind is.

'Think of Disney. Disney is selling Home Videos for $16.95 or $18.95 or whatever. All over the world-people, and we will speak particularly about mothers in this case, have something in their mind about Disney. Everyone in this room, when you say Disney, has something in their mind about Disney. When I say Universal Pictures, if I say 20th Century Fox, you don't have anything special in your mind. Now if I say Disney, you have something special in your mind. That is true around the world.

Now picture yourself with a couple of young kids, whom you want to put away for a couple of hours every day and get some peace of mind. You know if you get one video, they will watch it twenty times. So you go to the video store or wherever to buy the video. Are you going to sit there and premier 10 different videos and watch them each for an hour and a half to decide which one your kid should watch? No. Let's say there is one there for $16.95 and the Disney one for $17.95-you know if you take the Disney video that you are going to be OK. So you buy it. You don't have to make a quality decision on something you don't want to spend the time to do. So you can get a little bit more money if you are Disney and you will sell a lot more videos. It makes it a wonderful business. It makes it very tough for the other guy.'

Look at the emphasis on mind above. Buffett brings it up no less than four times in a single paragraph. Disney has a moat, not in the kind of movies it makes, not in the amusement parks world over and even not in the world renowned cartoon characters like Mickey Mouse and Donald Duck. Its moat lies in having a share of mind of its users - what they think of when the Disney name pops up. Same goes for Coke and a host of other companies in the exercise at the beginning of this story. Fevicol's moat is not in the adhesive it sells. It's in the image it has created in the minds of its consumers - 'Yeh Fevicol ka jod hai, tootega nahi.' Is Nescafe really the highest quality coffee you can get? Most likely not. But you know you won't go wrong with Nescafe anytime. What about Maggi? Even with the lead scandal a couple of years back, if offered a choice, we would more likely pick up Maggi at the stores than any newer brand we just don't know enough about. On the other hand, Maggi is something we've grown up on.

All these companies own a dominant position in the minds of their consumers, who come back again and again for their products. A top share of mind gives companies a big advantage over others.

Why a top share of mind is attractive
A top share of mind gives companies pricing power or the ability to raise prices without losing customers to competitors. Buffett explains how American Express was able to get away with higher prices only because it had top share of mind.

'American Express had a very special position in people's mind about financial integrity over the years, and ubiquity of acceptance. When the banks closed in the early '30s, American Express traveler's checks actually substituted, to some extent, for bank activity during that period.

American Express still had two-thirds of the market after 60 or 70 years - two-thirds of the worldwide market - while charging more for the product than these other very well-known competitors charged.

Anytime you can charge more for a product and maintain or increase market share against well-entrenched, well-known competitors, you have something very special in people's minds.'

Buffett saw this share of mind at work in another of his companies, See's Candies. He discusses how share of mind worked for See's Candies.

'What we did know was that they [See's Candies] had share of mind in California. There was something special. Every person in California has something in mind about See's Candy and overwhelmingly it was favorable. They had taken a box on Valentine's Day to some girl and she had kissed him. If she slapped him, we would have no business. As long as she kisses him, that is what we want in their minds. See's Candy means getting kissed. If we can get that in the minds of people, we can raise prices. I bought it in 1972, and every year I have raised prices on December 26th, the day after Christmas, because we sell a lot on Christmas.'

Top share of mind in our daily lives
A top share of mind keeps customers coming back for the same product again and again. How often have you changed your shaving blade. The likelihood is not very often. This is a behavioural response created by Gillette in our minds through years of effective advertising. Bombarded with its marketing jingle, we now believe Gillette is indeed the best a man can get.

Now think of shirts. You are more likely to buy shirts of a company you have not used before. This is because no shirt retailer in India has been able to create a distinct share of mind that will pull in customers to itself. Think of socks. Do you really care what brand of socks you buy or just grab those on sale in a triple pack?

A top share of mind is an important metric most of us investors often ignore. Buffett, on the other hand, pays a lot of attention to share of mind.

'We always think in terms of share of mind versus share of market because, if share of mind is there, market will follow.

People - virtually - probably 75 percent of the people in the world - have something in their mind about Coca-Cola. And overwhelmingly it's favorable. Everybody in California has something in their mind about See's Candy, and overwhelmingly it's favorable.

The job is to have it in a few more California minds - or world minds in the case of Coke - over the years, and have it even be a little more favorable as the years go by. If we have that, everything else follows.'

How to find companies with top share of mind
With a little effort, you can start searching out for companies that command their customers' share of mind. Here's Buffett on how you can train your mind to look for companies with share of mind.

'One of the interesting things to do is walk through a supermarket sometime and think about who's got pricing power, and who's got a franchise, and who doesn't. If you go buy Oreo cookies, and I'm going to take home Oreo cookies or something that looks like Oreo cookies for the kids, or your spouse, or whomever, you'll buy the Oreo cookies. If the other is three cents a package cheaper, you'll still buy the Oreo cookies. You'll buy Jello instead of some other. You'll buy Kool Aid instead of Wyler's powdered soft drink. But if you go to buy milk, it doesn't make any difference whether its Borden's, or Sealtest, or whatever. And you will not pay a premium to buy one milk over another. You will not pay a premium to buy one [brand of] frozen peas over another, probably. It's the difference between having a wonderful business and not a wonderful business.'

Once you've found companies with top share of mind, you need to think: will consumers still be buying this product 10-15 years from now?

 

Of course, there will be some companies that will be disrupted or will lose their share of mind, but most of the top names today are likely to be still going strong even 10 years from now. The important thing is to develop a thinking process that looks out for companies with such dominant share of mind. That will up your investment game to an unmatched level.