Q&A: Soldier of Misfortune

There certainly appears to be room for margin improvement with your first specific pick, CarMax.

CarMax (KMX Quote) is far and away the number one used-car superstore chain. The idea from the beginning was to create a model that is the antithesis of the way the used-car industry typically operates. CarMax has no-haggle sale and trade-in prices, all financing terms are clearly disclosed, their salespeople are not paid on the gross profit of each sale, and you're not handed off to "closers" who try to upsell you a bunch of things you don't want.

The competitive environment for CarMax is one of the most attractive I've ever seen. The industry is highly fragmented, made up of tens of thousands of small competitors, and there's no real number two doing things the way CarMax is. They have a substantial competitive advantage in that every lot has four to five times the inventory of the typical used-car dealer. If they don't have the exact model you want, they'll go on Carmax.com right there at the dealer and you have 20,000 cars to pick from. You can generally get the exact model, color and options you're looking for and they'll ship it between locations. No competitor can match that level of choice.

Another source of their moat is technology. They have a sophisticated inventory and pricing system that enables them to accurately price their sales and trade-ins. Wal-Mart tried a pilot project in Texas that tried to copy the CarMax model but abandoned it because it was too difficult. You have to be completely in this one business to do it well.

I also see their high customer satisfaction as a reinforcing competitive advantage. They're growing quickly because people learn about the model and appreciate the way the company is doing business. CarMax's position and upside, in my opinion, are very similar to Home Depot's back in the early 1980s.