The company has a wide moat, or competitive advantage. Like castles, some companies can easily be stormed by marauding competitors, while others are almost impregnable. Several forces can widen a companys moat: a strong brand identity (think of Harley Davidson, whose buyers tattoo the companys logo onto their bodies); a monopoly or near-monopoly on the market; economies of scale, or the ability to supply huge amounts of goods or services cheaply (consider Gillette, which churns out razor blades by the billion); a unique intangible asset (think of CocaCola, whose secret formula for flavored syrup has no real physical value but maintains a priceless hold on consumers); a resistance to substitution (most businesses have no alternative to electricity, so utility companies are unlikely to be supplanted any time soon).5

If cash from operating activities is consistently negative, while cash from financing activities is consistently positive, the company has a habit of craving more cash than its own businesses can produceand you should not join the enablers of that habitual abuse. For more on Global Crossing, see the commentary on Chapter 12. For more on WorldCom, see the sidebar in the commentary on Chapter 6. 5 For more insight into moats, see the classic book Competitive Strategy by Harvard Business School professor Michael E. Porter (Free Press, New York, 1998). Commentary on Chapter 11

The company is a marathoner, not a sprinter. By looking back at the income statements, you can see whether revenues and net earnings have grown smoothly and steadily over the previous 10 years. A recent article in the Financial Analysts Journal confirmed what other studies (and the sad experience of many investors) have shown: that the fastest-growing companies tend to overheat and flame out.6 If earnings are growing at a long-term rate of 10% pretax (or 6% to 7% after-tax), that may be sustainable. But the 15% growth hurdle that many companies set for themselves is delusional. And an even higher rateor a sudden burst of growth in one or two yearsis all but certain to fade, just like an inexperienced marathoner who tries to run the whole race as if it were a 100-meter dash. The company sows and reaps. No matter how good its products or how powerful its brands, a company must spend some money to develop new business. While research and development spending is not a source of growth to

The average budget for research and development varies across industries and companies. In 2002, Procter & Gamble spent about 4% of its net sales on R & D, while 3M spent 6.5% and Johnson & Johnson 10.9%. In the long run, a company that spends nothing on R & D is at least as vulnerable as one that spends too much.