Warren Buffett - These companies can achieve the best returns in the long-term

Key takeaways at the end

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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. 

1987 Shareholder Letter

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 [...]. But if a business requires a superstar to produce great results, the business itself cannot be deemed great. [...]

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. 

2007 Shareholder Letter

You will see that we favor businesses and industries unlikely to experience major change. The reason for that is simple:

Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now. A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.

I should emphasize that, as citizens, Charlie and I welcome change: Fresh ideas, new products, innovative processes, and the like cause our country's standard of living to rise, and that's clearly good. As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride.

1996 Shareholder Letter

* Bold emphasis added

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Key concepts and takeaways:

• Major changes = risk: Rapid changes and creative destruction are good for progress but might not work well for your investment returns. Good long-term investments are sometimes found in less exciting industries.

• Moat: When evaluating investment ideas, look for a long-term competitive advantage, so called “moat” or a “barrier to entry”, that protects excellent returns on invested capital. Having said that, all industries do evolve and one needs to understand megatrends, or continuous long-term forces prevailing in that particular industry. Look for companies that innovate well within their industry.