Wheat and chaff

Here is another great peace of advice from Warren Buffet (paraphrased:)

"It is better to buy great businesses at fair prices than buy fair businesses at bargain prices."

If only this advice had permeated my consciousness a few year earlier!

My success rate with buying so-called bargains is very low. This is because when companies hit hard times their share prices fall further than you could imagine. This has happened to me so many times: eBay, Vodafone, British Airways and CSR are all examples that have or are making me suffer.

One rule for the future: when catching a falling knife spread your purchases over 6 to 12 months to lower the risk.

For now I am going to go through each company that I own shares in and categorise them as either a great or fair business.

Barclays, Lloyds TSB, RBS, HBOS

These are all banks! Need I say more! In good times banks generate lost of profits but in hard times when loans start defaulting or the value of their assets starts plummeting they become very unattractive. Now is one of those times. The need for banks is not going to dwindle and their time will come again in due course. For this reason I am still fond of them but they are definitely only a fair business.

British Airways

BA is an airline! Need I say more! Airlines normally demand a great deal of capital in order to make a small loss! But BA has a great competitive advantage - its terminal and landing slots at Heathrow. For long haul passengers to and from London, Heathrow is more convenient than Gatwick or Stansted. CEO Willie Walsh also has a close eye on costs. For these reasons I think the share price will recover but it is definitely only a fair business.

CSR

CSR has some great Bluetooth products. It is also branching out into WiFi and GPS. However it is in a dynamic industry and there are plenty of competitors. The continued proliferation of wireless devices gives CSR a tail wind but it has no enduring competitive advantage and can only be a fair business.

Dana Petroleum

Dana has a history of increasing its oil production on a yearly basis by a combination of acquisitions and exploration. The share price just jumped this week after a new discovery. However it is selling a commodity and has no brand and so must be a fair business rather than an excellent one.

eBay

I have written so much about eBay in the last few years. If only words written were proportional to share price gains! eBay is an excellent business. It has a strong brand, an enduring competitive advantage and generates excess amounts of cash. One day the market will start agreeing with me!

BP

BP sells a commodity and has no real enduring competitive advantage although its network of refineries could not be easily matched. It is also returning a lot of money to shareholders but it is still only a fair business.

Genzyme

Genzyme is a fantastic business! It has a diversified range of drugs which seems to increase the sales each year without fail. It also has an exciting pipeline and generates enough cash to supplement its pipeline with acquisitions when something interesting crops up. One to hold for the long term.

British Land

British Land does not have an enduring competitive advantage or a strong brand although it does own some great commercial properties which should generate an increasing rental yield ad infinitum. A nice company but not an excellent one.

Shire

I have yet to fully get my head around Shire. It is not in the same league as Genzyme as it does not have the product diversity and all its growth seems to be via acquisitions rather than organic. Only a fair business.

ARM

ARM supplies processor designs that set the standard for low power processors. As more and more products go digital the demand for processors is not going to decline. However ARM is dependant on the whims of its customers and needs to keep investing heavily in R&D. It is almost an excellent business.

Phew! I make that 13 businesses and only 2 of them qualified as excellent.

I now need to find some excellent companies that I don't own. I am pretty sure that Google is one. Finding British examples may prove more difficult but Tescos looks good.

So the five year plan: ditch the fair businesses and overload on the excellent ones. And stop being distracted by "bargains."