“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 or possessing a powerful world-wide brand is essential for sustained success.”
“Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.”
“Additionally, this criterion eliminates the business whose success depends on having a great manager. Of course a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their business.
But if a business requires a superstar to produce great results, the business itself cannot be deemed great.”
Berkshire Hathaway – Letters to Shareholders, p.583
Buffett and Munger discuss their criterion for company selection.