Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing

Chapter 10. If You Don't Know Jewelry, Know Your Jeweler

[T]here was never any question in my mind that, first, Helzberg's was the kind of business that we wanted to own and, second, Jeff was our kind of manager.^[101]

—Warren Buffett

In 1989, Berkshire purchased Borsheim's, a jewelry store in Omaha. When I read about the announcement in the newspaper, I was puzzled. Why is the well-known value investor buying a dazzling business? Where is the value? Later, Buffett explained the cost advantage of Borsheim's: "We attract business nationwide because we have several advantages that competitors can't match. The most important item in the equation is our operating costs.... Just as Wal-Mart sells at prices that high-cost competitors can't touch and thereby constantly increases its market share, so does Borsheim's. What works with diapers works with diamonds."^[102]

Comparison with Wal-Mart: Cost Advantage

Buffett's analogy is worth repeating because it is not conventional wisdom: "What works with diapers works with diamonds." His point is that in almost any industry, cost advantage is important.

Cost advantage in the jewelry business may come from various sources. First, there is an advantage in location: Omaha is a less expensive place to operate a business than New York, and this can be especially relevant during economic downturns. Overheads are smaller, period. Keeping this philosophy in mind, most Wal-Mart stores are located in the suburbs, not in expensive city centers. Consequently, ...