🧠 Buffett’s Rules of Thumb

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Beyond Meat went public on May 2nd, 2019. It was valued at $1.5 billion.

While we applauded the company’s mission, we didn’t buy its stock.

Why? We didn’t believe Beyond Meat had a moat — or a sustainable competitive advantage. We couldn’t identify anything that Beyond Meat was doing that Tyson Foods or Kroger couldn’t also do at a lower price.

That decision looked dumb at first. Beyond Meat shot up to a $14 billion valuation in just two months. It was one the fastest (near) 10-baggers ever.

We, however, remained steadfast in our decision to pass. We still couldn’t see a moat. And – as we’ve learned the hard way – investing in such companies is like playing with fire.

The market has eventually come to the same conclusion. Beyond Meat’s stock is currently down 95% from its all-time highs, showing us (yet again) the importance of a moat.

There are lots of ways to look for moats. Warren Buffett has mastered the art of using financial statements to identify them. He shared 14 ‘rules of thumb’ that he created in the wonderful book Warren Buffett & The Interpretation of Financial Statements.

How did Beyond Meat’s 2019 numbers score on those ‘rules of thumb’? They failed 9 of the 14 tests.

Some of them were crucial, like:

  • Gross Margin: Buffett likes 40% at a minimum. Beyond Meat’s was just 20%.
  • Research and Development: Buffett wants less than 30% of gross profit spent on R&D. Beyond Meat was spending over 50%.
  • Selling, General & Administrative: Buffett wants less than 30% of gross profit spent on SG&A. Beyond Meat was spending over 500%.

What’s more, Beyond Meat was in a tenuous financial position. It was losing $0.51 for every $1.00 in sales. This suggested that Beyond Meat hadn’t built a moat (at least not yet).

Buffett’s rules of thumb aren’t universally applicable, but they offer key data points. And the more data points you have, the more likely you are to avoid investing in companies without sustainable moats.

Before you make your next investment, ask yourself, “Does this company have a moat?”

If the answer is “no”, you’re probably better off passing.

Wishing you investing success,

– Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. Want to learn more about Buffett’s 14 financial statement ‘rules of thumb’? Join us for a free webinar next Thursday (Sept 14th) at 12:00 PM EST. We’ll discuss them in detail and practice using them with live examples.

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