“Forget about share of market, think about share of mind.”
“Examples of memes are tunes, ideas, catch-phrases, clothes fashions, ways of making pots, or of building arches. Just as genes propagate themselves in the gene pool by leaping from body to body via sperms or eggs, so memes propagate themselves by leaping from brain to brain in a process which, in the broad sense can be called imitation. If a scientist hears, or reads about, a good idea, he passes it on to his colleagues and students. If the idea catches on, it can be said to propagate itself.”
It has been quite edifying to watch Berkshire Hathaway’s (NYSE:BRK.A)(NYSE:BRK.B) investments over the years, especially during the credit crisis, when Warren Buffett could pick from dozens of companies that were desperate for money. I believe that I have observed a certain pattern to his selections.
I first recall that he helped finance the buyout of Wrigley’s. Then there were investments in Tiffany (NYSE:TIF), Harley Davidson (NYSE:HOG), Goldman Sachs (NYSE:GS), General Electric (NYSE:GE) and Burlington Northern Sante Fe.
You can immediately categorize these companies into two groups: commodities and franchises. GE and Burlington Northern are commodities. There’s no emotional goodwill toward their products. You use them because you need to. I have nothing to say here.
Then there are the franchises, which are the focus of this post. Each franchise has positive global name recognition. If you say “Wrigley’s,” gum immediately comes to mind. You might even be able to imagine the taste of Wrigley’s gum as you read this. If you say “Tiffany,” robin’s egg blue immediately comes to mind. And silver. And possibly an engagement ring … and love and marriage. If you say “Harley Davidson,” a gruff biker comes to mind … or an unnecessarily loud bike. I think of some tattooed characters out of "Sons of Anarchy." Some people are nuts enough over the brand that they actually get Harley tattoos. Goldman Sachs is a lot less perceptible. But when you mention the company, people generally think of masters of the universe and really astute finance people.
The interesting thing is that when a company has a positive meme going for it, this creates all kinds of add-on benefits that manifest themselves in the financial statements in the form of superior margins, sales, etc. Buffett has identified a lot of companies with good memes. Then he waits for people to freak out due to some temporary downturn (usually macro, but sometimes micro) so he can buy them cheap. Nothing can keep a strong meme down for long. Over time, the meme recovers and the stock goes way higher.
Another interesting thing is that you don’t need to be a genius to know when a company has a powerful meme. Apple (NASDAQ:AAPL) is an obvious one. Louis Vuitton (OTC:MAGOF) and Hermes (OTCPK:HESAF) are two others.
Working with this logic, I don’t understand Research In Motion (RIMM) shareholders. The company has a terrible meme (being an outdated, third-place competitor) only a value investor could love. I’ve been a traditional value investor. I’ve been through that phase of thinking I could make money just by buying things cheap. I couldn’t. You’re much better off finding a company with a powerful meme and paying a fair price.
This brings me to my concluding thought. Google (NASDAQ:GOOG) made a mistake by buying Motorola (NYSE:MMI). They paid a very high price for a mediocre business. If they had waited a year or so, MMI would likely be available at much cheaper prices. Kind of like how HP should have waited for Palm to go bankrupt before buying it.
I really think Google is lost in the wilderness. The interesting thing is I use almost all of their products and yet I pay for none of them. Gmail, Google Docs, Youtube, Google+, Chrome and search are all free to me. If I used Android, Google still wouldn’t make money off of me. Google relies too heavily on search (and possibly Youtube) for its revenues and profits. How much more can they squeeze out of this business? I know it’s hard to imagine that search will not continue to do well. But Facebook and Twitter offer ways to access information I can’t get through Google. We could be witnessing a bubble in paid search – a bubble that really took off with Web 2.0 but may go away in the next phase of the Internet. GOOG has gone nowhere in years, so the market may understand this risk. “Value” investors, like flies to a light electrocutor, are attracted to the company because of its strong earnings record. My view is that the future here may look substantially different than the past.
P.S. Google TV is another incomplete beta product from Google. It is a piece of shit. For one thing, the web browser crashes all the time. The user interface is terrible. I can’t even read PDF files. I hope that Apple creates a TV, as is rumored.
Disclosure: I have a long derivative position in AAPL and a short derivative position in GOOG.