Anthony Deden | Learn From The Best
What Makes A Great Business?
Anthony Deden is a relatively obscure figure in the world of finance and investing. He founded and runs Edelweiss Holdings, an investment company based in Switzerland. Known for his conservative approach to investing, Deden focuses on capital preservation and long-term value creation. He is often described as having an unconventional investment philosophy that emphasizes understanding businesses deeply and looking for enduring quality rather than short-term gains. More particularly, he is known for his skepticism of modern financial theories and practices and rarely gives public interviews or appearances, which contributes to his somewhat enigmatic reputation in the investment world.
So let’s explore the world of investing through Deden’s eyes.
He says that the question he is asked most often, is “What makes a great business?”
Most people mistakenly try to solve this question using numbers, spreadsheets and complex models. But investing is far more nuanced than that. It’s an art not a science.
“I think it’s a mistake for people like us who are involved in financial matters to seek to reduce things to formulas. It is not a formulaic business, because it’s random. The randomness of human nature, the randomness of business…. So we need a little bit of humility and say, I think that the idea of having specific rigid formulas in judgment about anything, it’s just not suited to the complex world in which we live. You need to be able to weigh things much more frequently than measuring them.”
Anthony Deden, Edelweiss Holdings
If you were to ask most investors the question, "‘What makes a great business”, many would say high ROIC. But some companies have exceptional margins generating outstanding ROIC, only to be knocked off their perch after a short time. Netscape is the perfect example of a business that went from zero to 100mph in record time, only to crash back down to zero before reaching the finishing line. So achieving high ROIC is not the correct answer.
A better answer might be that exceptional businesses generate consistently high returns on invested capital, significantly exceeding their cost of capital, and are able to do so over the long-term. This kind of high ROIC allows a business to reinvest profits effectively, fueling further growth and value creation.
But even that doesn’t capture the essence of a great business. So let’s try again.
Great businesses are built on strong foundations of customer loyalty and sustainable competitive advantages that set them apart in the marketplace. Said differently, they create value that is hard for competitors to replicate.
Importantly, its not about seeking immediate financial returns, but fostering long-term value creation for customers - Costco is a perfect case study. When a business focuses on meeting deep, ongoing customer needs, it establishes itself as irreplaceable. This is crucial in an age where customers can easily switch brands or services.
Great businesses generate goodwill through reliable products or services that customers come to trust. This trust is not easily earned or replicated by competitors. For example, when customers think of certain brands, perhaps Coca-Cola or Apple, they often associate those brands with quality, consistency, and positive experiences. Its like having the power of owning a piece of the consumers mind. These emotional and practical associations are incredibly valuable intangible assets that often don’t appear on the balance sheet. Companies with strong brands tend to enjoy repeat business, and they become embedded in the customer's lifestyle.
A great business is not necessarily one that produces great goods and services, but a business that produces the most customers and captures the optimal lifetime value of those customers. Think McDonald’s - its food and dining experience are basic at best, but it makes more money than any top rated gourmet restaurant business run by a team of highly trained French chefs with the best front of house dining experience. That's because McDonald's is able to produce more customers than the gourmet restaurant and to capture more lifetime value from each customer!
Great businesses possess the ability to raise prices without significantly impacting demand. This pricing power is often a result of strong brand loyalty, product differentiation, or high switching costs for customers. It allows the company to maintain or expand profit margins, even in the face of rising costs or competitive pressures.
These businesses are positioned to withstand economic downturns. Since customers associate great businesses with fulfilling vital needs, they’re more likely to stick with them even when times are tough. When the world was hit by economic uncertainty in the wake of the Covid-19 pandemic, did anyone stop drinking Coca-Cola, cease using their Apple device or quit shopping at Costco? Of course not. This kind of loyalty can't be bought; it's earned through years of consistent, reliable performance. A great business, therefore, is one that can weather the ups and downs of the market, because it has cultivated a base of loyal customers.
A great business differentiates itself in ways that others cannot easily copy. It might be through a unique product offering, proprietary technology, or an exceptional customer service model. These elements make it difficult for competitors to imitate and allow the business to stay ahead over the long term. Factors like owning patents, controlling critical supply chains, accessing superior talent, or simply having a better understanding of customer needs enable a business to outpace its competitors.
“People don’t know what they want until you show it to them. It’s hard for [them] to tell you what they want when they’ve never seen anything remotely like it. Our task is to read things that are not yet on the page.”
Steve Jobs, Apple
This competitive advantage doesn’t just offer temporary gains. Instead, it provides enduring benefits that compound over time. The businesses that rise to the top are often those that not only build these advantages but also continue to strengthen them as the market evolves. This adaptability is a crucial component of what makes a business great. It’s not just about having an initial edge; it’s about keeping that edge sharp as industry conditions change.
Exceptional businesses are adept at converting their earnings into cash flow. This ability provides financial flexibility, allowing the company to reinvest in growth initiatives, return capital to shareholders, or weather economic downturns. Strong cash flow generation is often indicative of a business's operational efficiency and the quality of its earnings.
Along with durable earnings, a great business must maintain a robust balance sheet with manageable debt levels and sufficient liquidity. This financial strength provides a buffer against economic uncertainties and allows the company to capitalize on opportunities as they arise. A healthy balance sheet also reduces the cost of capital, further enhancing the company's ability to create value.
The ability to reinvest is a hallmark of a great business. A truly great business doesn’t rest on its laurels or get complacent once it achieves success. Instead, it reinvests its profits into growth initiatives, whether that’s expanding product lines, improving operations, or exploring new markets. Reinvestment allows a business to continue meeting customer needs in increasingly innovative ways. This forward-thinking approach enables companies to stay relevant, attract new customers, and retain their existing base.
A great business has the capacity to scale its operations and capture a larger market share without proportionally increasing costs. This scalability often leads to improved profit margins as the business grows.
Reinvestment is closely tied to the concept of surplus value. A great business continually looks for ways to create more value than it extracts. In other words, it seeks to provide customers with a sense that they’re getting more out of the relationship than they’re putting in. Costco creates so much value for its customers in terms of cost savings, that they become almost life-long members. When businesses achieve this, customers feel satisfied and even grateful. They see the company as a partner rather than just a provider. This sense of mutual benefit deepens loyalty, enhances goodwill, and solidifies the company's competitive standing.
Everything comes down to the management team behind the business. Great businesses are often steered by visionary leaders who understand not just the immediate market conditions but also the long-term trends shaping the future. These leaders are typically proactive, seeking out new opportunities while staying true to the core principles that made the business successful in the first place. Strong leadership helps a company navigate challenges, make bold decisions, and continue to deliver value even when faced with adversity.
In great businesses, management incentives are closely aligned with the interests of shareholders. This alignment ensures that decision-making is focused on long-term value creation rather than short-term gains or personal benefits.
Great businesses also recognize the importance of being valued, not just by its shareholders, but by its customers and society at large. By doing so, they build a reputation that attracts new business and strengthens their existing relationships. Companies that focus on this kind of holistic value creation are more likely to stand the test of time, as their success is tied to a deeper sense of purpose beyond profits.
So, having defined a great business, how does an investor find one? The answer, is not to look for them, but to eliminate those that don’t fit the requisite criteria and then see which companies are left. It will be a surprisingly small number of businesses and that is the pool in which an investor ought to be fishing.
“The trick in life, generally speaking, is knowing what not to do, knowing what not to read, knowing what advice not to take. Because if you can do that, you have eliminated a very large subset of what you ought to be looking at, et cetera. So that’s how I started. I started by exclusion, and I still believe that very strongly.”
Anthony Deden, Edelweiss Holdings
If you want to learn more about Deden, I highly recommend this interview, one of very few he has given. It runs for over two-hours, but it will be time well spent: