Charlie Munger, the late vice-chairman of Berkshire Hathaway, said about Costco Wholesale Corporation, in 2014: “I'm not allowed to own anything I don't totally love. And there are very few companies that I totally love. Costco is one of them.” He owned the stock until he died. He was paid handsomely for the conviction. Costco compounded its earnings at roughly fourteen percent a year for the duration of his ownership, almost entirely on the strength of one number: the percentage of customers who paid for their membership again, the year after they last paid for it.

That number, the renewal rate, has hovered around ninety-three percent for two decades. There are not many businesses on Earth where ninety-three percent of customers come back, year after year, voluntarily, and pay for the privilege of buying things at a fraction of a markup. Apple users do not renew a membership. Coca-Cola drinkers do not renew a membership. The discounters do not have memberships. Costco does. The membership is the moat.

The membership is the moat.

The business model — selling things at slightly above cost, taking a five-to-six-percent gross margin, and making most of the profit on the membership fee — has been written about so many times that it now reads as a commonplace. It is not. It is one of the rarest things in retail, which is a contract with the customer that pre-pays the relationship for a year. It means Costco does not have to beat Amazon on price every Tuesday morning. It only has to be worth a hundred and twenty dollars a year, paid up front, in late January. The bar is, by retail standards, extraordinary low. By human standards, the work to defend it — squeezing suppliers, refusing to mark up, refusing to advertise, paying employees forty percent above the industry — is extraordinary high. The combination has lasted forty years.

When we run the protocol against Costco we get an intrinsic value somewhere north of a thousand dollars per share. The exact number moves week to week with the long Treasury yield, but the headline does not. Mr. Market is asking, this morning, slightly more than that. Two years ago he was asking five hundred. Three years ago he was offering it at four hundred and ninety. Anyone who bought Costco in October of 2022 and has held it since has, by entirely conventional measures, doubled their money — and by the more important measure, owned a piece of a wonderful business.

The Δ% on the Tape this morning depends on whose discount rate you use. The protocol, with the standard Treasury input and no sector premium (Consumer Defensive carries none), produces a number that suggests Costco is offered modestly above fair value today. If you are willing to ascribe a structural premium to the renewal-rate moat — to assume, in effect, that Costco is harder to disrupt than the average consumer-staples business — the answer narrows. Reasonable people disagree on the size of that premium. We do not apply one in the canonical protocol because the protocol's value comes from being applied identically to every business. Costco does not get a special favor. Charlie did not need one to make the call.

What does Mr. Market think today? He thinks Costco is worth roughly what he was asking last week. He has been calm on it for some months — drifting up half a percent here, down half a percent there. The mood is neither manic nor depressed. The mood is bored. Bored is sometimes when the most useful work happens — checking the cash-flow statement, watching the renewal rate, doing nothing.

The patient owner does not need to act on Costco today. The patient owner needs to be ready, on the unremarkable Tuesday two or three years from now when Mr. Market is, for whatever reason, in a foul enough mood to offer it back below the buy line. That day will come. Charlie's heirs are, presumably, awaiting it.

— The editors