Here is a rundown of the typical cash flowing assets and the types of income delivered:
Of Assets and Income
· Rental Property = Rental Checks
· Dividend Paying Stocks = Dividend Distributions
· Covered Call Options = Call Premium
· Systemic Business Models = Earnings Distributions
· Intellectual Property = Royalties, Licensing Fees
The question is; where do mutual funds fit into this bucket of cash flowing assets if at all? The first place to look is found in the common ground that lies between Warren Buffett’s “business perspective” investing methodology and the model of a cash flow rental property investor.
These are some beautiful records folks. Although it appears that Coke had a dip in 2011, the company is actually coming off of a high of $5.06 in 2010 so, still on a steady, upward trajectory with growth of over 12%
This is what Warren Buffett looks for:
1. I want a consumer monopoly …
2. With strong earnings,
3. A High Rate of Return …
4. With the ability to retain earnings,
5. Possessing low debt levels …
6. With the ability to increase prices with inflation,
7. And healthy margins.
It’s almost like a haiku, a Warren Buffett haiku.
The Consumer Monopoly
If the product disappeared from grocery store shelves tomorrow, would you notice? Do you own a “Tom’s Brand X” product or do you own a Coke, Disney or Kellogg’s? If all of the cereal aisles at your local grocery mart were suddenly wiped clean of Rice Krispies, Frosted Flakes or Corn Flakes, would shopper’s not give a hoot or do you think you might see a few panicked faces uttering “hey, what the hell is going on here?” If your business is similar to the latter, then you may have a consumer monopoly, a brand emblazoned in the hearts and minds of consumers, that would create panic and swearing if it disappeared.
As Opposed To …
The commodity type business. Are you the manufacturer of Ally’s All-Encompasing Aluminum or Phil’s Boisterous, New and Improved Oil? Then you may own a commodity type business.
As a consumer, when’s the last time you shopped around for lumber based on the brand name? Steel? Aluminum? Gas? Okay, you might have some loyalty in the last example to Phil’s Filling Station if Phil makes a great tuna salad sandwich but I bet if Dan’s across the street lowers the gas, you won’t think twice before driving across the street, tuna be damned! These businesses chiefly compete on price alone and summarily knock the stuffing out of each other when it comes to margins.
A business with supreme, consumer monopoly brand name recognition on the other hand cannot be easily knocked off. It has a type of insurance for a sustainable business model that in some instances creates a price premium for a piece of the brand that consumers have fallen in love with.
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