More Praise for The Warren Buffett Way, First Edition

Washington Post
was at age 13. He delivered both the 
Wash-
ington Post
and the 
Times-Herald
on his paper route while his father
served in Congress. Buffett likes to remind others that with this dual
delivery route he merged the two papers long before Phil Graham
bought the 
Times-Herald.
Obviously, Buffett was aware of the newspaper’s rich history. And
he considered 
Newsweek
magazine a predictable business. He quickly
learned the value of the company’s television stations. The 
Washington
Post
had been reporting for years the stellar performance of its broadcast
division. Buffett’s personal experience with the company and its own
successful history led him to believe that the 
Washington Post
was a
consistent and dependable business performer.
Gillette
Few companies have dominated their industry as long as Gillette. It was
the lead brand of razors and blades in 1923 and the lead brand in 2003.
Maintaining that position for so many years has required the company to
spend hundreds of millions of dollars inventing new, improved products.
Even though Wilkinson, in 1962, developed the first coated stainless
steel blade, Gillette bounced back quickly and has since worked hard to
remain the world’s leading innovator of shaving products. In 1972,
Gillette developed the popular twin-blade Trac II; in 1977, the Atra
razor with its pivoting head. Then, in 1989, the company developed the

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T H E W A R R E N B U F F E T T W AY
popular Sensor, a razor with independently suspended blades. Gillette’s
consistent success is a result of its innovation and patent protection of its
new products.
Clayton Homes
In f iscal year 2002, Clayton reported its twenty-eighth consecutive
year of prof its, $126 million, up 16 percent from the year before, on
revenue of $1.2 billion.
11
This performance is all the more extraordi-
nary when we consider the fearsome problems that others in the indus-
try experienced. In the late 1990s, over 80 factories and 4,000 retailers
went out of business, a victim of two colliding forces: Many manufac-
turers had expanded too quickly and at the same time had made too
many weak loans, which inevitably led to widespread repossessions, fol-
lowed by diminished demand for new housing.
Clayton had a different way of doing business (more about their poli-
cies in Chapter 6). Its sound management and skillful handling of rough
times enabled the company to maintain profitability even as competitors
were going bankrupt.
FAV O R A B L E L O N G - T E R M P R O S P E C T S
“We like stocks that generate high returns on invested capital,” Buffett
told those in attendance at Berkshire’s 1995 annual meeting, “where
there is a strong likelihood that it will continue to do so.”
12
“I look at
long-term competitive advantage,” he later added, “and [whether] that’s
something that’s enduring.”
13
That means he looks for what he terms
franchises.
According to Buffett, the economic world is divided into a small
group of franchises and a much larger group of commodity businesses,
most of which are not worth purchasing. He def ines a franchise as a
company whose product or service (1) is needed or desired, (2) has no
close substitute, and (3) is not regulated.
Individually and collectively, these create what Buffett calls a 
moat
—
something that gives the company a clear advantage over others and pro-
tects it against incursions from the competition. The bigger the moat, the
more sustainable, the better he likes it. “The key to investing,” he says,

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I n v e s t i n g G u i d e l i n e s : B u s i n e s s Te n e t s
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“is determining the competitive advantage of any given company and,
above all, the durability of that advantage. The products or services that
have wide, sustainable moats around them are the ones that deliver re-
wards to investors.”
14
(To see what a moat looks like, read the story of
Larson-Juhl in Chapter 8.)
A franchise that is the only source of a product people want can
regularly increase prices without fear of losing market share or unit vol-
ume. Often a franchise can raise its prices even when demand is f lat and
capacity is not fully utilized. This pricing f lexibility is one of the def in-
ing characteristics of a franchise; it allows franchises to earn above-
average returns on invested capital.
Another defining characteristic is that franchises possess a greater
amount of economic goodwill, which enables them to better withstand
the effects of inf lation. Another is the ability to survive economic
mishaps and still endure. In Buffett’s succinct phrase, “The definition of
a great company is one that will be great for 25 to 30 years.”
16
Conversely, a commodity business offers a product that is virtually
indistinguishable from the products of its competitors. Years ago, basic
commodities included oil, gas, chemicals, wheat, copper, lumber, and
orange juice. Today, computers, automobiles, airline service, banking,
and insurance have become commodity-type products. Despite mam-
moth advertising budgets, they are unable to achieve meaningful prod-
uct differentiation.
Commodity businesses, generally, are low-returning businesses and
“prime candidates for prof it trouble.”
17
Since their product is basically
no different from anyone else’s, they can compete only on the basis of
price, which severely undercuts prof it margins. The most dependable 
( Text continues on page 77.)
Look for the durability of the franchise. The most important
thing to me is f iguring out how big a moat there is around the
business. What I love, of course, is a big castle and a big moat
with piranhas and crocodiles.
15
W
ARREN
B
UFFETT
, 1994

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C A S E I N P O I N T
J
U S T I N
I
N D U S T R I E S
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In July 2000, Berkshire Hathaway bought 100 percent of Texas-
based Justin Industries for $600 million. The company has two
divisions: Justin Brands, which comprises four brands of West-
ern boots, and Acme Building Brands, with companies that
make bricks and other building products.
Cowboy boots and bricks. It is one of Berkshire’s most in-
teresting, and most colorful, acquisitions. And it says a great
deal about Warren Buffett.
In many ways, Justin epitomizes all the business strengths
that Buffett looks for. Clearly, it is simple and understandable;
there’s nothing particularly complex about boots or bricks. It
represents a remarkably consistent operating history, as a look
at the separate companies will show; all have been at the same
business for many decades, and most are at least a century old.
Finally, and most especially, Buffett recognized favorable long-
term prospects, because of one aspect that he highly admires: in
what are essentially commodity industries, the products have
achieved franchise status.
Justin Brands
The company that is now Justin began in 1879 when H. J. ( Joe)
Justin, who was then 20 years old, started making boots for
cowboys and ranchers from his small shop in Spanish Fort,
Texas, near the Chisholm Trail. When Joe died in 1918, his
sons John and Earl took over and in 1925 moved the company
to Fort Worth. In 1948, Joe’s grandson John Jr. bought out his
relatives (except Aunt Enid ), and guided the business for the
next f ifty years.
John Justin Jr. was a legendary f igure in Fort Worth. He
built an empire of Western boots by acquiring three rival com-
panies, worked out the deal to buy Acme Bricks in 1968, and
served a term as Fort Worth mayor. He retired in 1999, but
stayed on as chairman emeritus, and that’s why, at the age of 83,
it was he who welcomed Warren Buffett to town in April 2000.

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Justin Boots, known for rugged, long-lasting boots for
working cowboys, remains the f lagship brand. But Justin Brands
includes other names.
•
Nocona,
founded in 1925 by Enid Justin. One of Joe
Justin’s seven children, Enid started working in her father’s
company when she was twelve. After her nephews moved
the family business from the small town of Nocona, Texas,
to Fort Worth in 1925, Enid set up a rival company in the
original locale. Against all odds, she built a success. Fierce
competitors for years, the two companies were joined under
the Justin name in 1981. Enid, who was then 85, reluctantly
agreed to the merger because of her declining health.
•