Speaker A
Warren Buffett explains the difference between a great business, a good business, and a gruesome business, explained visually by Brian Forall. A great business has a high and expanding competitive advantage or moat. It has strong pricing power, moderate earnings growth, very low capital intensity, and high returns on capital. This is lots of cash, is not dependent on good management, and these are great businesses to buy and hold forever when the valuation makes sense. Good businesses have a moderate competitive advantage, moderate pricing power, grow at a moderate to high rate, require extensive reinvestment, have moderate to high capital need, good returns on capital, produce some cash flow, and good management is required. Businesses like this, you should buy when they're cheap, and you should sell when they're expensive. The final category is gruesome businesses, which have no barriers to entry, no pricing power, have earnings growth that requires continuous reinvestment, are very capital intensive, have low intrinsic returns on capital, they burn significantly more cash than they consume, and even with great management still perform poorly. These businesses should be avoided at any cost. If you're a long-term investor, your goal should be to fill your portfolio with great businesses and avoid gruesome ones. You want a free copy of my most popular investing visuals like this? Check the video description for more.
