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Buffett and Munger are strong believers that companies should stick to their knitting, stay within their circle of competence, and not try to stretch themselves to expand into other product areas. They should also be very careful about trying to replicate success in one geographical area by investing precious money to trying to attract customers in others areas.
They also like simple to understand businesses which occupied a niche subject to little change, be that technological change or social change. Buffett expressed it well in his 1987 letter,
“Severe change and exceptional returns usually don’t mix. Most investors, of course, behave as if just the opposite were true. That is, they usually confer the highest price-earnings ratios on exotic-sounding businesses that hold out the promise of feverish change. That prospect lets investors fantasize about future profitability rather than face today’s business realities. For such investor-dreamers, any blind date is preferable to one with the girl next door, no matter how desirable she may be.
Experience, however, indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns.” (1987 Letter)
Three decades later uniforms are being made and sold in much the same way. Sure, fabrics and factory machinery might have improved, and the internet has impacted marketing and sales, but the fundamentals are much the same as they were back then.
Buffett points us to evidence outside of Berkshire to support his case that companies which keep drilling-down on continually improving and straight-forward business – not dashing all over the place in fast moving markets and technologies – generally perform better. He says that only 25 out of 1,000 companies in a Fortune study produced average returns on equity over the ten years 1977 through 1986 in excess of 20%, and no year was worse than 15%. During that decades 24 of these “superstars” outperformed the S&P 500. ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
