$100 Billion Warren Buffett Doesn't Want

"If you gave me $100 billion and said, 'Take away the soft-drink leadership of Coca-Cola in the world,' I'd give it back to you and say it can't be done." -- Warren Buffett

As investors, we're used to losing ourselves in numbers -- in companies' price-to-earnings (P/E) ratios, their returns on equity (ROE), and their growth rates and profit margins. That's good -- those are important measures of financial and operational health.

But equally important to a big-picture view are less quantitative factors: the quality of management, the health of the customer base, industry headwinds or tailwinds, regulatory oversight, and whatever sustainable competitive advantages a company has.

Today, I'd like to focus on one of the biggest -- and most recognizable -- competitive advantages a company can enjoy: brand power.

Chris Davis, of the Clipper Fund, said of Harley-Davidson (NYSE: HOG): "It's the only brand in the world that people tattoo on their body. ... It is an incredibly powerful brand that way."

Brand power also gives Coca-Cola its global soft-drink leadership. And it's why we associate Disney (NYSE: DIS) with lovable characters, high-quality animation, and children's movies.

Indeed, the Disney brand is almost Pavlovian, evoking childhood memories like none other. The brand has power. Once Disney has a hit, it can leverage its brand across many platforms -- TV, movies, merchandising -- and then create sequels or spinoffs for those TV shows and movies.

Brands are power
The dollar value of brands is hard to quantify, but it's undeniably there, often allowing companies to charge more for their products.

Think about it. Coca-Cola sells a similar sugar-water cola to generic store brands all over the world -- but consumers trust the taste and consistency of Coke's product. Similarly, if you're looking to buy a computer, you'll likely pay more for a brand name you know and trust, rather than opt for a cheaper model with an unknown label. Brands are tough to value, but they can attract a lot more money to a company's coffers.

Each year, brand research firm Interbrand puts out a list of the world's top brands and attempts to estimate brand values. Below I've provided some of Interbrand's top brands from the 2008 survey; as an interesting exercise, note what portion of the firms' market capitalization each value represents. (They're not piddly!)

Company	Brand Value	Recent Market Cap	Brand % of Market Cap
IBM (NYSE: IBM)	$59 billion	$137 billion	43%
General Electric (NYSE: GE)	$53 billion	$134 billion	40%
Toyota (NYSE: TM)	$34 billion	$125 billion	27%
Intel (Nasdaq: INTC)	$31 billion	$88 billion	35%
McDonald's (NYSE: MCD)	$31 billion	$59 billion	53%
Disney	$29 billion	$41 billion	70%

Source: Interbrand.com.

This exercise notwithstanding, I wouldn't spend too much time trying to assess the actual dollar value of a particular brand. As business professor Aswath Damodaran has explained, "To me, valuing brand name, for the most part, seems to be a cosmetic exercise. It is not as if Coca-Cola would ever be able to sell its brand name and stay a viable company."

Brands in Fooldom
Stock watchers here at The Motley Fool pay close attention to brands. Indeed, co-founding brothers David and Tom Gardner have recommended many brand-heavy enterprises in our Motley Fool Stock Advisor service, which they launched more than seven years ago. It's outperformed the S&P 500 by 41 percentage points, on average, over that time.

In a recent issue of Stock Advisor, David had this to say about the importance of brands: "When a brand is all that stands between a premium product and a mere commodity, it must be aggressively protected." Krispy Kreme's failure to do so earned it a sell recommendation from David. The company had a strong brand, associated with fresh, warm doughnuts, but it had begun expanding its distribution channels by offering cold doughnuts in supermarkets and elsewhere -- which undermined the brand and what it stood for.

What to do
So as you're researching top stocks, pay close attention to the brand. Spend a little time thinking about the brand a company has, and the power and value behind those brands.

If a company's brand is strong, it can amass the power to maintain or raise prices. Brands can enjoy emotional strength, too. If customers are really devoted to it, making it a "cult brand" -- witness the folks who tattoo themselves with Harley-Davidson logos! -- their devotion can support a business for years and years. These diehards also make excellent sources of free word-of-mouth advertising for their favorite brands.

When all those factors work in combination, you have a brand like Coca-Cola -- one so strong that even Warren Buffett wouldn't want to take the other side of a $100 billion challenge.

How One Top Stock Changes Everything

Where were you in August 1994, and what were you doing? When I tell you where I was, you won't believe it. (Of course, you'll have to read to the end to find out.)

I hope you were buying stocks
I wasn't. I sure wasn't betting $1,800 on a company most people had never heard of. But somebody was, and he was about to make a lot of money. I know this for two reasons.

First, that one trade made this guy a legend. Second, he told us exactly what he was going to do before he went long. Then he tracked his returns, in pretty much real time, online for the world to see.

Five years later, his split-adjusted $0.46 shares crested atop $50. Before you could say "mad money," Money.com called him "among the most widely followed stock market advisors in the world," and his $1,800 stake was worth $190,000.

Yes, you read that right
That stock was America Online -- and the investor was David Gardner, co-founder of The Motley Fool. True, we were in the midst of a bull market -- true, too, this was before Steve Case stuck it to Time Warner (NYSE: TWX) -- but there may have been more at work here than that.

In 1994, AOL satisfied David's No. 1 criteria. The company was what he called a first mover in an important emerging industry. And this may surprise you: David still owns AOL -- and he's still up.

If you'd bought AOL with him, you'd still be up some 1,600%. If, like my college roommate, you saw the tech revolution coming and bought any number of other future tech titans -- for example, Microsoft (Nasdaq: MSFT) or Oracle (Nasdaq: ORCL) -- instead, you'd be up a more modest 571% or 833%, respectively. And this is after two of the greatest bear markets in history.

Even if you rolled the dice on Applied Materials (Nasdaq: AMAT), you'd still be sitting on big gains. Even Corning (NYSE: GLW), a glass company since held up as the poster child for the tech stock bubble, is up over that time period.

I'm shocked, shocked to hear ...
Maybe that doesn't surprise you, but it did me. In fact, it got me rethinking two long-held beliefs -- one of which led to an epiphany.

The other was more of an affirmation: For folks like us looking to save for the future, it pays to keep investing. For me, that means buying good companies, whether the market looks overvalued, cheap, or downright scary (like it has recently). That last part goes double if you manage to catch lightning in a bottle.

After all, while it's true that AOL wasn't the only great call in David's original Rule Breaker portfolio -- he also recommended Amgen (Nasdaq: AMGN) and eBay (Nasdaq: EBAY) in 1998 and 1999, respectively -- if you take away that one 1,600% winner, David looks human, right? More on that just ahead.

But first, the epiphany
Slow and steady may not win the race. Like most Fools, I've been well-versed in Warren Buffett's rules to investing. You know, "Rule one: Never lose money. Rule two: Never forget Rule One."

But what if David's right? What if, most nights, we can get by with just a few big swings? What if it's true that nine out of every 10 stocks we buy can go to zero and we'll still break even -- if we find just one 10-bagger.

Of course, it is true. It's a mathematical certainty. That's how one stock changes everything.

Because I have news for you ...
"The Tortoise and the Hare" isn't a true story. It's not even based on one. Take away AOL, Amgen, and eBay ... and David's pretty average. But that's crazy talk. You don't compare the batting average of a singles hitter with that of a slugger.

The fact is, David's kamikaze style works over the long run. And not just in the go-go '90s. In 2004, David launched a new Rule Breakers newsletter to prove he could find this decade's great growth stories.

How does he plan on pulling it off? For starters, he runs every company through a six-point checklist:

1. Is it the top dog and first mover in an important, emerging industry?
2. Does it have a sustainable advantage?
3. Does it have strong past price appreciation?
4. Is good management in place with smart backing?
5. Does it have strong consumer appeal?
6. Has it been called overvalued by the media?

Looking to hit one out of the park?
If you can find a top stock with all six traits, you have a Rule Breaker in the making. And contrary to the hysterics in the media pronouncing the death of buy-and-hold, I'd argue this is the time to buy stocks for the long run