Coke or Pepsi?
Mac or Windows?
iPhone or Android?
Chances are good you feel strongly one way or the other… and nothing will change your mind.
That’s the power of brand loyalty.
It’s an important idea that the world’s best investors—including Warren Buffett—understand… and use to find stocks that can generate steady gains for decades, in both good times and bad.
Today, we’ll explain how to spot these companies…
Why Warren Buffett loves strong brands
To better understand the power of brands, let’s look at Warren Buffett’s definition of “franchises”—his favorite type of investment.
In his 1991 letter to shareholders, Buffett wrote:
“An economic franchise arises from a product or service that: (1) is needed or desired; (2) is thought by its customers to have no close substitute and; (3) is not subject to price regulation.”
In other words, Buffett looks for companies that are essentially immune from—or at least resistant to—competition… have a loyal fan base… and can raise prices without losing a lot of customers.
By contrast, a “business,” as defined by Buffett, earns exceptional profits only if it’s the lowest-cost operator or if supply of its product or service is tight. Even then, these “businesses” are constantly facing competition in terms of price and product quality.
In short, a strong brand acts like a “moat” to protect a company from its competitors. And because of their moats, franchises can do better than their less powerful “business” peers across all economic conditions.
That makes these companies great to own during times of high inflation, deflation, and even in a recession, as their loyal customer bases keep coming back, regardless of rising costs or a tough economy.
Put simply, franchises are a near-perfect all-weather investment. They might not be the cheapest stocks in the market—but for good reason: They’ll help you sleep well at night, regardless of market conditions. And they’ll typically generate growing profits—and rising dividends—year after year.
Now, you might be thinking, “That sounds great, but how can I spot the kind of brands that have long-term staying power?”
Here’s a simple shortcut…
Check which companies are consistently rising (or maintaining a high ranking) on one of the many lists of the world’s most valuable brands maintained by companies like Forbes and Kantar. The valuation methodology varies depending on the list, but all the rankings account for the company’s financial strength and the brand’s contribution to profits.
Let’s look at an example. Apple (AAPL) is constantly topping “best brand” lists. And over the past five years, the stock is up about 144%… vs. about 87% for the S&P 500.
Given Apple’s top position on the list of the world’s best brands, it’s no surprise the stock is Buffett’s largest portfolio holding… by far.
Obviously, Buffett has a lot of confidence in Apple’s ability to generate market-beating returns for many years to come.
This is just one example of the power of a strong brand. Take a look at the stock performances of the other top companies and you’ll see many others boasting massive long-term returns.
Conclusion
Franchises are the ultimate buy-and-hold stocks. Thanks to their focus on customer loyalty and brand-building, these companies are able to outperform their peers… while rewarding their shareholders year after year, across all economic conditions.
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