#this is the capacity i have for creativity w this starter

[angelfallens]

“ i fucked up. ” 

[reddiess]

[stan_the_man messaged you]

For the anon who wrote:  "stenbrough social media/college au where person A is an instagram model and person B is a fan who has a friend that forces them to follow and comment, and !! person A notices him!!!!" i’m so sorry something was wrong with the connection so i either didn’t post it or deleted it but shoot me a message if you liked it op! you can also find this on my AO3 Requests are open, shoot me a prompt for a fic or headcanon!! Summary:  Stanley Uris has an undying crush on Instagram model Bill Denbrough. Which is fine, until Richie Tozier goes and messages him. * The moment Stanley Uris spots his best friend with his phone in his hand, suspiciously only tapping once on the screen and with purpose, is the moment he knows Richie Tozier is fucking dead. "Richie," he draws the word out as if to question his friend's entire existence. "What are you doing with my phone?" The traitor looks up and has the audacity to smile innocently, like he doesn't know what Stanley is talking about. "Um... Nothing?" "Nothing my ass," Stan murmurs under his breath before sizing the situation up and jumping into action. He throws himself over the back of their leather couch but Richie is already out of the living room, wheezing as he bolts towards the kitchen door. Stan stops and crosses his arms in front of his torso, waiting for the inevitable— CRASH! He watches with perverse satisfaction as his flatmate trips over the ironing board standing in the entrance to the kitchen, toppling to the floor. "There's something in the way," he deadpans. "Watch out."

"Fucking bitch." Richie pushes himself up. Somehow, there's still an unnerving grin splitting his frog face in two. "I still messaged him though."

Stanley's eye twitches. "Who exactly, again?" He stomps over to the monster he calls his best friend and rips his phone out of his hand. "WHAT THE FUCK!"

*

DING!

stan_the_man followed you

DING!

stan_the_man mentioned you in a comment: @billyboy boi fuk me up u fiiiiiiine

Bill Denbrough's eyebrows draw together in confusion, his stare almost piercing holes into the touchscreen of his phone; what kind of language...?

DING!

stan_the_man messaged you: dam boi are u a pair of ray bans bc ud look great sitting on my face ;);););)

The line is so out of the blue and bizarre that Bill actually bursts out laughing. He sits up and quickly screenshots the ridiculous message to send to the groupchat with his closest friends.

Out of pure curiosity he clicks on stan_the_man's profile and is surprised to find that the guy looks fairly normal – handsome, even – and not at all creepy like he would've expected. There's also no trace of the attitude or the, um, grammar he used in his direct message to Bill. He actually just looks like a regular guy who's nice and hot and therefore way out of Bill's league.

He goes back to the direct message to type in a reply but changes his mind pretty quickly. Should he even address something as childish and weird as this message? Should he even...

DING!

He almost drops his phone in surprise.

stan_the_man: Oh God, sorry. That was my roommate, this is so embarrassing. He thinks he's funny.

No emojis, no pickup lines. But at least the guy has good grammar. That's more than what he normally sees on Instagram these days.

*

Stan tries to forget all about the most embarrassing event of his life, also known as the time Richie dm'd his Instagram crush with a godawful fuckboy one-liner. He doesn't unfollow Bill Denbrough though because why would he?

He does still spend a good majority of his free time stalking the guy's profile. What can he do when Bill is literally perfect with all his black and white photoshoots and colorful model shots in European countries and mirror selfies with his dog? What is Stan supposed to do, ignore it? Yeah well, not today - and not only because he's a photography major and the shots make his heart weep but also because Bill is ridiculously perfect.

So here's the brief story of how he found the guy: He was exhausted after a long day of work and was in search of a movie stupid enough for his mushy brain to absorb. In this state of mind, a person's brain capacity is not exactly at its full potential, and so that's his excuse for clicking on a Buzzfeed article titled "21 Hottest Male Models We Shamelessly Follow On Instagram". Go figure.

All of them were hot, of course. But Bill Denbrough was... something else. All Stanley could think about was photographing him. Most of the models were these muscly, handsome machos with chiseled jawlines and messy hair - your typical, well, douchebag look. None of them were Stan's type by far, so he was ready to close the article but then he saw number 21, Bill Denbrough aka @billyboy. Bill was... stunning, to say the least. For starters, he didn't have any facial hair, one point for him. He was not buff, more of a tall and lean type, another point. Not the average face that's considered universally attractive but more of a unique charm and he seemed to have a dog; more points. His bio said:

Bill Denbrough 23yr old model based in New York, loves dogs, books, nature and tv shows. Advocate for LGBTQ+ and homeless youth. For business inquiries, please contact...

His pictures all matched with his bio, Stan realized as he scrolled through his profile. He really was a dog and nature lover, liked to read and was actively helping the LGBT and homeless youth - infinite points and there went Stanley Uris' heart.

So that was then. Now is now, and now... Stan is getting a message from him.

What!?

Stan clears his cache, force stops and restarts the Instagram app and cold boots his phone but it's still there:

billyboy: Haha, no problem man. I know a lot about annoying roommates. I like your work btw!

What. The. Fuck. He doesn't know if he should smack Richie or kiss him.

stan_the_man: Wow, thank you! I'm a photography & imaging major so they're mostly my assignments, but some of them are just for fun. Are you still studying?

Lame, but kind of okay. Acknowledged Bill's compliment, gave a bit of insight related to the topic, asked to show he's also interested in having a conversation. That's normal, right? He waits a couple of minutes before sending it just so he doesn't seem desperate but gets a reply almost instantly.

billyboy: Yeah, I'm studying creative writing, it's my last year though. Can't wait to be out of uni tbh.

stan_the_man: same, I'd sell my soul at this point for it to be over

Bill laughs, or at least sends a laughing emoji so Stan guesses he does. That's how he starts talking to his Instagram crush.

*

It doesn't help much with his crush, talking to Bill. If anything, it makes him like the guy even more, which in turn just makes his heart hurt when he thinks about how he doesn't have a chance. Sometimes he has a flicker of hope, like when Bill says something especially flirty or compliments his new picture. He doesn't post many selfies but the one he does Bill ends up commenting on ("What a handsome curly man #crying") and Stanley ends up gaining 300 followers overnight.

And his infatuation with the model just keeps growing and growing. He's certain Bill is not perfect, he can't be but what can a man do when it sure seems like he is? Stan has no chance. So he does the stupidest thing he can do and invites him out for coffee. As soon as he sends the message he throws his phone across the room, the childhood habit of biting his fingernails making a short but threatening return. Get your act together, Stanley thinks. He's just a guy.

He's Bill Denbrough, he's not just some guy! His mind helpfully supplies.

You're arguing with yourself again. Stop it.

I do whatever I w--

DING!

That has to be Bill. It has to be. Stan carefully rounds his bed and reaches for his phone, pushing the home button so he sees his lockscreen. The preview of Bill's message starts with Sure! When are you... and then it's cut off.

Stanley looks around to see if Richie is in hearing distance, and when he finds he's in the clear, he does a dance of celebration.

He really should give a present of gratitude to Richie now.

*

It goes well. Coffee, that is. They hit it off right away because as normal as Bill comes through in his messages, his humour actually aligns with Stan's in that dry, passive aggressive, death loving kind of way. Which is fine. Amazing.

What's not amazing however, is how perfect he actually is. Stan sees his clear skin and perfect hair and amazing body proportions and red lips every day on Instagram but it has nothing on the real thing. There's just no way any camera could ever capture the charisma the guy has.

(Stanley is going to try though. Even if Bill wouldn't have agreed to it, he would somehow bribe him into modeling for his portfolio. He did agree though, and without any extra convincing too so Stan is going to make the most of that promise.)

It turns out that Bill's favorite tv show is Supernatural, bless his soul, but his favorite movie is Edward Scissorhands, which Stan also loves. They also realize they go to the same university and actually took a course together last semester – some bullshit class where attendance wasn't mandatory – except Stan never realized it. Bill traveled a lot last year due to his modeling career and Stan literally never was there so there was little to no chance of them meeting; which is nice because he would have had an aneurysm on the spot.

When he gets home that afternoon Richie is already sitting in the armchair in their living room with crossed legs.

"I see you've had a fun day," he waves his phone at Stanley, who has to squint to see that Bill has uploaded the selfie they took together to his Instagram.

"None of your business," Stan replies and automatically turns to leave. Well, he would if Richie Tozier didn't jump on his back the next second and really, how is he that fast?

"Tell me EVERYTHING Stan the man, don't you even think about sparing me any juicy details!" Richie booms in his ear before he manages to shake him off enough that only his arms remain locked around Stan's neck. "Come oooon, I hooked you guys up!"

"What the fuck do you mean you hooked us-" DING! "Excuse me, I have to go." He unceremoniously bites Richie in the forearm until he has no chance to let go with a yelp.

"At least tell me later!" his best friend shouts after him but he's already halfway to his room. He plops down onto the light blue bedsheets he changed just yesterday, and the faint smell of the detergent kind of reminds him of how Bill smelled when they half-hugged while saying goodbye.

billyboy: Thank you for the coffee today! I actually have a confession to make.

billyboy: Tell me if I got the wrong message or anything but I had a very hard time not kissing you after we met. I just thought it would be fair to tell you.

Stan turns so his face mushes into the pillow and screams.

*

("When were you going to tell me this?!" Richie shouts, pushing his phone screen into Stan's face. "HUH?"

It's a picture Bill took on campus of them kissing - he uploaded it onto his Instagram story which in turn spiked hundreds of fans to raid Stanley's DM's – mostly with positivity – and Richie to, apparently, have a mental breakdown.

"Just die," Stan replies, pushing the oversized phone out of his face, but he is smiling. "I was going to tell you later, maybe when we're not in the library? You're making a lot of noise."

He's pretty sure he can see Richie's face turn purple with how much he's trying not to scream.

He is going to buy him a present, don't worry. But for now, he has to work on his assignment so he can go meet his boyfriend.)

[heliosfinance]

The Most Powerful Mental Model for Identifying Stocks

For starters, we had our Value Investing Workshop in Chennai yesterday, and here are some moments from the same…

The next workshops are are in Mumbai (19th Feb), Delhi (25th Feb), and Hyderabad (5th March). In case you wish to join any of these, please click here to register.

“It’s a funny thing about life; if you refuse to accept anything but the best, you very often get it.” ~ -W. Somerset Maugham – English dramatist & novelist (1874-1965)

Maugham’s thought holds a great relevance when it comes to picking up businesses for investment. So, the results of your investing efforts are decided not after you make or lose money in 5-10 years, but at the very moment you decide to own a specific business.

Pick up a business with good economics and with good margin of safety, and the probability of making money in the long run is high. Pick up a business with poor economics with any margin of safety, and the probability of losing your shirt, and entire wardrobe, in the long run is very high.

Understanding a business also adds significantly to your margin of safety, which is a great tool to protect yourself against losing a lot of money.

Here is what Buffett wrote in his 1997 letter to shareholders…

If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need.

If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.

Buffett’s investment approach combines qualitative understanding of the business and its management (as taught by Philip Fisher) and a quantitative understanding of price and value (as taught by Ben Graham).

He once said, “I’m 15 percent Fisher and 85 percent Benjamin Graham.”

That remark has been widely quoted, but it is important to remember that it was made in 1969. In the intervening years, Buffett has made a gradual but definite shift toward Fisher’s philosophy of buying a select few good businesses and owning those businesses for several years.

If Buffett were to make a similar statement today, the balance would come pretty close to 50:50.

Anyways, any discussion on Buffett’s focus on understanding businesses must start with how he defined various businesses as per their economics. And that’s exactly what I’ll try to do now.

Businesses are Great, or Good, or Gruesome Buffett created three broad categories of business, which he first defined in his 2007 letter to shareholders. He wrote that either a business is great, or good, or gruesome.

Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag. We like to buy the whole business or, if management is our partner, at least 80%.

When control-type purchases of quality aren’t available, though, we are also happy to simply buy small portions of great businesses by way of stock market purchases.

It’s better to have a part interest in the Hope Diamond than to own all of a rhinestone.

Anyways, in his 2007 letter, Buffett grouped businesses into three general categories – great, good, and gruesome – based on their return on investment profile, and explained the differences between these categories. I find what follows below as a great mental model while assessing businesses. And the characteristics that Buffett defined to distinguish between these three categories form an important part of my investment checklist.

First, the Great Business Buffett wrote in his letter…

A truly great business must have an enduring “moat” that protects excellent returns on invested capital.

The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low-cost producer or possessing a powerful world-wide brand is essential for sustained success.

Business history is filled with “Roman Candles,” companies whose moats proved illusory and were soon crossed.

Now, while most investors search for companies that have had certain competitive advantages or moats that have helped them do well in the past, or they are doing better than competitors in the present. But Buffett here is not just talking about the moat of a business, but in the endurance or sustainability of that moat.

Look at a market like India. We have had several companies doing great business at specific points in their lifetime, but have fallen from grace over years, and are now just a pale shadow of their glorious past. Whatever reasons there may be for the disappearance of moats for these companies – competition, change in industry structure, capital misallocation – the point is that all companies go through a lifecycle, from birth till stagnation or death.

To quote Horace, “Many shall be restored that now are fallen, and many shall fall that now are in honor.”

There are only handful that survive more than a few decades. You won’t find many such companies in a rapid growth market like India, where entrepreneurial spirit is high and any high-return business will attract competitors sooner than later, thereby lowering the average returns for all players over time.

Thus, the idea must be to look for companies that can survive and thrive at least over the next 20 years – businesses that have…

Great brands, and where consumers are willing to pay higher prices for the perceived higher value;

Low cost of operations, which enable them to lower prices and still maintain good margins;

Operate in simple and growing industries;

Clean balance sheets that provide them the capacity tp suffer bad times; and

Managements with history of making rational capital allocation decisions.

This choice has to be made NOW (when you are making the investment decisions), not AFTER you lose money in businesses that have all these characteristics missing.

Anyways, here is what Buffett writes on enduring moats…

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

Now, while the management quality must be of great importance for you while picking your businesses, Buffett says the quality of the business is paramount. As he wrote…

…this criterion (of identifying businesses with “enduring” moats) eliminates the business whose success depends on having a great manager. Of course, a terrific CEO is a huge asset for any enterprise, and at Berkshire we have an abundance of these managers. Their abilities have created billions of dollars of value that would never have materialized if typical CEOs had been running their businesses.

But if a business requires a superstar to produce great results, the business itself cannot be deemed great.

A medical partnership led by your area’s premier brain surgeon may enjoy outsized and growing earnings, but that tells little about its future. The partnership’s moat will go when the surgeon goes. You can count, though, on the moat of the Mayo Clinic to endure, even though you can’t name its CEO.

Now, while “growth” rules the roost when investors are searching for businesses to invest in, Buffett has a different take on this. Stability – in industry, business economics, earnings, and growth – is more important for him, than just growth.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere.

A Great Business is an Economic Franchise Buffett terms a great business as an “economic franchise”, and believes that it arises in a business that sells a product or service that:

Is needed or desired (continuous and rising demand)

Is thought by its customers to have no close substitute (customer goodwill is much better than accounting goodwill, and allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price)

Is not subject to price regulation (price maker)

Here is what he wrote in his 1991 letter…

The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital.

Moreover, franchises can tolerate (short-term) mis-management. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.

A business that is not a franchise, writes Buffett, can be killed by poor management.

In effect, what Buffett seemingly meant was that since a bad management cannot permanently dent the prospects of an economic franchise (except due to long-term mis-management), any stock market downturn provides a great opportunity for investors to consider such businesses (that may also fall in tandem with the markets) for investment.

You must, however, be very careful confirming that a business is a franchise. After all, there’s many a slip twixt the cup and the lip.

Should You Buy and Forget Franchises? Not really, Buffett thinks. He wrote in his 2007 letter…

There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

In other words, while it pays to pay up for quality businesses please avoid overpaying for them expecting to keep earning money from these stocks the way you or others may have earned from them in the past.

Trees, after all, don’t grow to the sky. And to repeat Horace – “…many shall fall that now are in honor.”

Buffett’s Other References to a Great Business Here are a few other references that Buffett has made over the years in his letters, describing the characteristics of a great business…

Our acquisition preferences run toward businesses that generate cash, not those that consume it. (1980)

The best protection against inflation is a great business. Such favored business must have two characteristics: (1) An ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) An ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital. (1981)

One question I always ask myself in appraising a business is how I would like, assuming I had ample capital and skilled personnel, to compete with it. (1983)

Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. (1996)

The really great business is one that earns…high returns, a sustainable competitive advantage and obstacles that make it tough for new companies to enter. (2007)

“Moats”—a metaphor for the superiorities they possess that make life difficult for their competitors. (2007)

Long-term competitive advantage in a stable industry is what we seek in a business. (2007)

The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. (2009)

Your “Great Business” Checklist You can use the above points to create your checklist for identifying the great businesses out there.

Alternatively, and an even better way, would be to invert the points and then avoid businesses that are not great. This, I believe would be an easier task, given the enormous number of “Roman Candles” out there – companies whose moats are illusory and will soon be crossed.

So, if you were to invert Buffett’s points on great businesses, here is how your checklist may look like.

Avoid a business that…

Consumes more cash than it generates.

Has managers who boast of certainties and invincibility.

Earns poor return on capital.

Operates in an industry where it’s easy for new companies to enter and succeed.

Operates in an unstable industry (maybe due to technological changes, or government regulations)

Requires consistent infusion of new investment to grow.

Doesn’t have an ability to increase prices.

Isn’t able to accommodate large volume increases in business with only minor additional investment of capital.

Second, the Good Business Buffett writes that while a great business earns a “great” return on invested capital that creates a moat around itself, a good business earns a “good” return on capital.

So what is the core difference here?

Well, while a great business does not require too much of incremental capital to grow, a good business requires a significant reinvestment of earnings if it is to grow. Thus, with a high level of capital intensity, such a business requires high operating margins in order to obtain reasonable returns on capital, which means that its capacity utilization rates are all-important.

In India, leading companies from the capital goods, automobile and banking sectors will find place in this category. Buffett writes that if measured only by economic returns, such businesses are excellent but not extraordinary businesses.

Broadly, good businesses are ones that…

Enjoy moderate but steady competitive advantage, which typically arises due to their size and thus economies of scale

Require good managements at the helm, that can execute the plans well to generate high return on rising invested capital

Grow at a moderate to high rates, and thus

Require constant infusion of fresh capital

Third, the Gruesome Business Here is where we are going to spend a lot of time, for a majority of the businesses out there would fall in this category. Buffett wrote in his 2007 letter…

The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.

Most asset-heavy or commodity businesses would fall into this category. As Buffett wrote in 1983…

…as they generally earn low rates of return – rates that often barely provide enough capital to fund the inflationary needs of the existing business, with nothing left over for real growth, for distribution to owners, or for acquisition of new businesses.

Now the question is – Why do such companies earn low rates of return? Buffett answers in his 1982 letter…

Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles.

What finally determines levels of long-term profitability in such industries is the ratio of supply-tight to supply-ample years. Frequently that ratio is dismal.

If…costs and prices are determined by full-bore competition, there is more than ample capacity, and the buyer cares little about whose product or distribution services he uses, industry economics are almost certain to be unexciting. They may well be disastrous.

Now the second question is – So are all companies from such industries to be avoided at all costs?

Buffett says some of such companies do make money, but only if they are low-cost operators. As he wrote in his 1982 letter…

A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable. By definition such exceptions are few, and, in many industries, are non-existent.

In fact, when a company is selling a “commodity” product, or one with similar economic characteristics, being the low-cost producer is a must. What is more, for such companies, having a good management at helm is also very important.

From Buffett’s 1991 letter…

With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.

Such companies can also earn high returns during periods of supply shortages.

When shortages exist…even commodity businesses flourish. (1987)

But such situations usually don’t last long…

One of the ironies of capitalism is that most managers in commodity industries abhor shortage conditions—even though those are the only circumstances permitting them good returns. (1987)

When they finally occur, the rebound to prosperity frequently produces a pervasive enthusiasm for expansion that, within a few years, again creates over-capacity and a new profitless environment. In other words, nothing fails like success. (1982)

Buffett’s Brush with Gruesome Business For the Buffett we know today – the man who has compounded money at over 20% over the last 5+ years – it may sound surprising but he had a brush with a gruesome business at the very start of his career.

The company was Berkshire Hathaway (Buffett’s present-day investment arm), and the business it was in was textile. Buffett calls it the biggest mistake of his career.

What is interesting, Buffett was fairly “happy and comfortable” owning Berkshire’s textile business till a few years after he bought it. This is what he wrote in his 1966 letter…

Berkshire is a delight to own. There is no question that the state of the textile industry is the dominant factor in determining the earning power of the business, but we are most fortunate to have Ken Chace running the business in a first-class manner, and we also have several of the best sales people in the business heading up this end of their respective divisions.

While a Berkshire is hardly going to be as profitable as a Xerox, Fairchild Camera or National Video in a hypertensed market, it is a very comfort able sort of thing to own. As my West Coast philosopher says, “It is well to have a diet consisting of oatmeal as well as cream puffs.”

Buffett had bought Berkshire simply because it was “too cheap and thus a bargain” then, and he was yet to come under the influence of “quality and moats” driven investing, which would have led him to avoid this business.

Anyways, in 1967, here is what Buffett wrote on Berkshire’s textile business…

Berkshire Hathaway is experiencing and faces real difficulties in the textile business, while I don’t presently foresee any loss in underlying values. I similarly see no prospect of a good return on the assets employed in the textile business. Therefore, this segment of our portfolio will be a substantial drag on our relative performance if the Dow continues to advance. Such relative performance with controlled companies is expected in a strongly advancing market, but is accentuated when the business is making no progress.

As a friend of mine says. “Experience is what you find when you’re looking for something else.”

Then, in 1969, on being asked why he continued to operate the textile business despite not getting a good return on it, Buffett wrote…

I don’t want to liquidate a business employing 1100 people when the Management has worked hard to improve their relative industry position, with reasonable results, and as long as the business does not require substantial additional capital investment. I have no desire to trade severe human dislocations for a few percentage points additional return per annum. Obviously, if we faced material compulsory additional investment or sustained operating losses, the decision might have to be different, but I don’t anticipate such alternatives.

Good Managers Vs. Gruesome Businesses Buffett has mentioned several times in the past that even a great management would find it difficult to bring order back to a business with poor economics, like the textile business, or commodity or airline businesses.

So, while Buffett had a great manager in the form on Ken Chase at Berkshire’s textile business, the business still floundered and was sold off in 1985.

Here are things Buffett has written over the years on why even good managers cannot turn around bad businesses…

In some businesses, not even brilliant management helps I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. (1989)

Good jockeys will do well on good horses, but not on broken-down nags. (1989)

When an industry’s underlying economics are crumbling, talented management may slow the rate of decline. Eventually, though, eroding fundamentals will overwhelm managerial brilliance. (As a wise friend told me long ago, “If you want to get a reputation as a good businessman, be sure to get into a good business.”) (2006)

My conclusion from my own experiences and from much observation of other businesses is that a good managerial record (measured by economic returns) is far more a function of what business boat you get into than it is of how effectively you row (though intelligence and effort help considerably, of course, in any business, good or bad). (1985)

Should you find yourself in a chronically-leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks. (1985)

As per Buffett’s estimates, had he never invested a dollar in the textile business and had instead used his funds to buy a business with a better economics, his returns over the course of his career would have been doubled.

Like for Buffett, a gruesome business is not just a terrible investment for you, but also a major distraction that would cost you in terms of opportunity cost.

Lessons Learned What lessons can we learn from Buffett’s textile endeavours? Well, there are two, in Buffett’s words.

One, “If you get into a lousy business, get out of it.”

Two, “If you want to be known as a good manager, buy a good business.”

Also, if you own the best business in a bad industry (like textiles, airline, commodities, and retailing), please note what Buffett wrote in 1985…

“A horse that can count to ten is a remarkable horse – not a remarkable mathematician. Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company – but not a remarkable business.

Buying a Gruesome Business Cheap Well, that’s exactly what Buffett did in case of Berkshire Hathaway. Under the influence of Benjamin Graham, and without considering the industry’s economics, Buffett bought just because the stock was trading extremely cheap.

Then, after offloading the textile business, Buffett wrote this in 1989…

Unless you are a liquidator, that kind of approach to buying businesses is foolish. First, the original “bargain” price probably will not turn out to be such a steal after all. In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen.

Second, any initial advantage you secure will be quickly eroded by the low return that the business earns. For example, if you buy a business for $8 million that can be sold or liquidated for $10 million and promptly take either course, you can realize a high return. But the investment will disappoint if the business is sold for $10 million in ten years and in the interim has annually earned and distributed only a few percent on cost.

Time is the friend of the wonderful business, the enemy of the mediocre.

This is an extremely important lesson for you if you thought buying a stock cheap would save you from the ills of a poor underlying business.

Summing Up I have tabulated the distinction between the great, good, and gruesome businesses as under…

To sum up Buffett’s description of great, good, and gruesome businesses, here is what he wrote…

…think of three types of “savings accounts.” The great one pays an extraordinarily high interest rate that will rise as the years pass. The good one pays an attractive rate of interest that will be earned also on deposits that are added. Finally, the gruesome account both pays an inadequate interest rate and requires you to keep adding money at those disappointing returns.

If you have to remember just one lesson from today’s post, it must be – Time is the friend of the wonderful business, the enemy of the mediocre. So please pick and choose very carefully.

Also Read:

Buffett’s 2007 Letter to Shareholders

Buffett’s Three Categories of Returns on Capital

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