“We want Berkshire to be an ever-growing collection of good businesses that we can hold forever.”

That’s what master investor Warren Buffett said about his recent acquisition of battery-maker Duracell. The Wall Street Journal reports Buffett’s holding company, Berkshire Hathaway, acquired Duracell from Procter and Gamble Co. (P&G) in an unusual way. Berkshire already owned $4.7 billion in P&G shares. That happened in 2005 when P&G bought Gillette… a business in which Buffett was the largest investor.

To complete the Duracell transaction, Buffett handed over all $4.7 billion in P&G shares. In exchange, P&G injected Duracell with $1.8 billion in cash. These maneuvers allowed both companies to avoid paying taxes on the deal. Berkshire will save about $1 billion in taxes.

Many in the financial sphere emphasize the tax aspects as the main driver of Berkshire’s Duracell purchase. Why else would he buy a company with no major growth potential, they ask. But those who believe this misunderstand Buffett’s investment philosophy on a fundamental level. Duracell owns about 25% of the global battery market. It’s a well-managed, global brand that oozes constant cash flow.

Consider this excerpt from Buffett’s 1989 letter to Berkshire’s shareholders:


If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase” will make that puff all profit.

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.

You might think this principle is obvious, but I had to learn it the hard way—in fact, I had to learn it several times over…

I could give you other personal examples of “bargain-purchase” folly but I’m sure you get the picture: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price [emphasis added].

Charlie [Munger, Buffett’s Berkshire Hathaway partner] understood this early; I was a slow learner. But now, when buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.

Bottom line: Buffett’s Duracell move provides another classic example of what we call “Legacy Investing.” You seek out world-class businesses. You buy them at good valuations. They reward you over time… and compound your investment in ways other businesses never will. It’s the surest, safest approach to generating enormous wealth through the stock market.