Berkshire Hathaway 2018 Annual Meeting Audience Question # 48

How to forecast the degree of future success of a product

Warren Buffett:

OK. Station 5.

Audience Member: Good afternoon. My name’s Adam Bergman with Sterling Capital in Virginia Beach, Virginia. I’m here with my daughter Michelle from Cape Henry Collegiate in Virginia Beach.

Audience Member:

Hi Warren, hi Charlie.

Audience Member:

Our question for you is how you go about attempting to forecast the degree of future success of one specific product in a good business versus another, such that you invest in American Express and Coca-Cola rather than Diners Club or RC Cola, for example. Thanks.

Warren Buffett:

Well, with American Express… it was an interesting situation, because Diners Club got there first. I think American Express, in a certain sense… I mean, they did it for a lot of reasons… but they went into the credit card business because they were worried about what was going to happen to traveler’s checks. And… although traveler’s checks are… still exist in a significant way.

But the interesting thing when American Express went into competition with Diners Club, and with Carte Blanche, as I remember that… which also existed at the time… was that instead of charging less than Diners Club and going in figuring they were going against the established guy and they’d come in at a lower price, they went in it at a higher price, as I remember.

And the American Express centurion was on that card. I’ve got one that I got in 1964, but they were in it before that. It had more value in time. I mean, it got better representation. And frankly, if you were a salesperson out with somebody, and you could pull out that American Express card with that centurion, you looked you were JP Morgan. And if you pulled out the Diners Club, it had a whole bunch of flashy symbols, you looked like a guy that was kiting his checks from one month to the next, and…

A fellow named Ralph Schneider… Ralph Schneider and Al Bloomingdale developed the Diners Club. And they were very smart about getting there first, but they weren’t smart about how they merchandised it subsequently.

RC Cola, you know, it did… there are all kinds of colas that came after Coke. I mean, you know, you go back to 1886 and come up with something at Jacobs’ Pharmacy that’s incredibly successful, you know, fairly soon you’re going to get lots of imitators. But Coke really is the real thing. And you know, you offer me RC Cola and say, “I’ll give it to you at half the price of Coca- Cola,” in terms of drinking it, I mean, just, this is a product that’s 6 1/2 ounces, sold for a nickel in 1900, you know. And now if you buy it on the weekend and buy it in large quantities and everything, you’re not paying that much more. This newspaper was three cents in 1942, you know. I mean, the amount of enjoyment per real… in terms of the real… of what you pay for this, has gone dramatically down in inflation-adjusted money. So it is a bargain product.

You know, you have to look at… See’s Candy, you know, if you live in California and you were a teenage boy, and you went to your girlfriend’s house and you gave the box of candy to her or to her mother or father and she kissed you, you know, you lose price sensitivity at that point.

So we really want products where people feel like kissing you, you know… rather than slapping you.

It’s an interesting thing. I mean, you know, in effect we’re betting on the ecosystem of Apple products, but… led by the iPhone. And I see characteristics in that that make me think that it’s extraordinary. But I may be wrong.

And you know, so far we’ve been… I would say we’ve been right on American Express and Coca-Cola.

American Express had this huge salad oil scandal in 1960 happen… in ’63, November, right around the time Kennedy was shot. And there was really worry about whether the company would survive.

But nobody quit using the card. Nobody quit using the traveler’s checks. And they charged a premium price for their traveler’s checks. So there are things you can see around consumer products that sometimes can give you a pretty good insight into the future. And then sometimes we make mistakes.

Charlie?

Charlie Munger:

I’ve got nothing to add, except that if we’d been offered a chance to go into Coca-Cola right after it was invented, we probably would have said no.

Warren Buffett:

We’d have turned it down. Yeah.

Charlie Munger:

It would’ve looked kind of silly to us.

Warren Buffett:

Well, unless we drank it, now, Charlie, listen.

No, he’s right. I mean, we don’t foresee things that we haven’t got a lot of evidence in on. And…

Charlie Munger:

No.

Warren Buffett:

We want to see a lot of… if we’re talking about a consumer product… we want to see how a consumer product behaves under a lot of different circumstances, and then we want to use something… actually, there was a book by Phil Fisher written around 1960 called “Common Stocks and Uncommon Profits.” It’s one of the great books on investing (you can get a copy of the book here).

And it talks about the “scuttlebutt method” of investing, which was quite a ways from what Ben Graham taught me in terms of figures. But it’s a very, very good book. And you can learn a lot, you know, just by going out and using some shoe leather.

Now they call them channel checks now or something like that. But it’s… you can get a feel for some products, and then there are others you can’t. And then sometimes you’re wrong. But it is a good technique. It’s an important investing technique, I would say that. And Ted and Todd do a lot of that. And they have people… some people that help them out on doing it, too.

Charlie’s done it with Costco. I mean, he’s…

I mean, all the time he is finding new virtues in Costco, you know, and then it… and he’s right, incidentally. I mean, Costco has an enormous appeal to its constituency. They delight… they surprise and delight their customers. And there is nothing like that in business. You have delighted customers, you’re a long way home.

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