9 Examples of a Competitive Advantage (#9 is One of Buffett’s Favorite Type to Look For!)
Finding a company with a competitive advantage means finding an investment that will offer solid returns for decades to come. What identifies a company with a strong competitive advantage? Some results may surprise you.
“…managers and investors alike must understand that accounting numbers are the beginning, not the end, of business valuation.”
There is so much more to finding a good investment than finding a specific ratio on a company’s balance sheet. As Buffett says, evaluating a company’s financial statement should be the beginning of your research, not the end.
Buffett has made his billions by identifying companies with strong competitive advantages, and buying and holding those companies for decades (Or as he says, preferably forever).
A strong competitive advantage means that a company will continue to make profits year in and year out, no matter the economic or political environment. It maximizes shareholder wealth by harnessing the power of compounding interest in its accumulated earnings.
But, a strong competitive advantage is not identified just by looking for a certain Price to Book (P/B) or Price to Earnings (P/E) ratio. Instead, it means understanding how the business operates and how the company’s financial statements identify advantages the company has its in field.
For example, consider Coca-Cola’s current ratio. Historically, it has been under 1. Any basic stock screen that excludes companies with current ratios of less than 1 (which is a quick test to see which companies can afford to pay their bills over the next 12 months, read more on current ratio here), would have excluded Coca-Cola from the results.
How can it be possible that one of America’s strongest companies looks like it won’t be able to afford to pay its bills by a simple ratio like the current ratio? It turns out, this may in fact be a sign of a significant competitive advantage for a select set of companies!
A low current ratio is #4 below, here are the rest:
And if you can’t tell from the picture alone, Millennial’s (and every other generation’s) biggest mistake is playing it too safe – allocating 70% (!) of their money in cash. [continue reading…]
Today in Stock Market History: How to Turn $100,000 into $101 Billion (Infographic)
How Much is TOO Much to Pay for a Wonderful Company? A Look at a Current Great Business, and Buffett’s Past Purchases
One of the more famous investment quotes, which represents a mindset that has created one of America’s most valuable companies, from one of the most successful investors of all time:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Warren Buffett
And that got me thinking…At what price did Buffett purchase some of his “wonderful” businesses and how does that compare to some “wonderful” stocks today? And what is considered a “fair” price? [continue reading…]
Chart of the Week: How Buffett’s Wealth has Grown Over Time – The Power of Compounding Interest
Buffett says that compounding interest is one of the main reasons he is where he is today. In our Chart of the Week, we look at his journey in detail. From his first $120 saved from selling packs of gum and coca colas in 1942 to his $72 billion today. [continue reading…]
Chart of the Week: Dimensional Fund Advisors vs. Benchmarks
This week we are looking at one fund company with a stellar track record and looking at the ins and outs of their investment philosophy. The company is Dimensional Fund Advisors (DFA for short), which is one of the fastest growing large fund managers out there today.
Now today in our chart of the week we look at how his company as applied that philosophy and how they (and their investors) have benefited. [continue reading…]
Read of the Year: Buffett and Munger Come Together for Berkshire’s 50th Anniversary Shareholder Letter
The release of Warren Buffett’s annual letter to shareholders is always a special occasion, but this year’s is extra special. 2015 marks the 50th year that Warren Buffett has owned Berkshire Hathaway, and in celebration Buffett and his vice chairman, Charlie Munger got together to make sure this year’s letter was stuffed with nuggets for investors. So without wasting any more time, here is the best investing advice you will ever get: [continue reading…]
Fund Spotlight Series: Investing In Rental Property? There is an ETF (and a Motif!) For That
The concept of owning rental property looks great on the surface. Borrow money to buy a home (or condo, or townhouse), rent out that property to someone else, and have them effectively pay your mortgage while you build up equity in the property and it (hopefully) appreciates in price.
Unfortunately as many rental property owners will tell you, there can be a fair amount of headaches in the process. Do you do all the work and maintenance, answer the 2 a.m. phone calls and market the property yourself? Or do you give up 10-15% of your rental income to have a property management company do the hard work?
Then there is the potential risks. There is a huge potential hidden liability in owning a rental house. When the roof needs work, do you have $5,000 ready to fix it? When the HVAC goes out, can you fork over another $5,000? The number of big ticket items that can break in a house is a bit scary.
And with the median home price at about $204,000, investing in rental property without taking out a mortgage is out of reach for most individual investors.
But Wall Street has made a much easier, and much less scary way of investing in rental properties. Today we look at one such exchange traded fund: iShares Residential Real Estate ETF – Ticker: REZ. – Then we show you a new, even better way to investing in rental property with Motif Investing. [continue reading…]
Quote of the Week: Celebrating Stock Market Crashes
The markets have been dealt a small dose of realism this past week. It turns out markets don’t go straight up all the time.
Small Cap Indexes like the Russell 2000 have taken the brunt of the selling and are down about 10% from their highs.
Large cap indexes like the S&P 500 are down about 3% from their record highs.
This “sell off” has already led to the fear inducing headlines from the financial media, as seen below.
But a lot of smart investors would argue that this is exactly the OPPOSITE reaction you should be having. [continue reading…]
Quote of the Week: Why are Consistent Earnings so Important?
All of a sudden it is pretty apparent that the stock market has moved a long ways from the recession of 5 years ago.
Today, OpenTable, with a net income of $33 million is being purchased by Priceline for $2.6 billion. Facebook, is now worth nearly $200 billion, twice the value of McDonalds despite having just one fourth of McDonald’s profits. And Tesla Motors is worth $33 billion – exactly half the value of Ford, despite selling just 22,400 cars in 2013. (To put that in perspective, that is how many F-150 pick up trucks ford sells in about 2 weeks, and is less than 1% of the total number of vehicles that ford sold in 2013).
Investors have one thing in mind when paying these exceedingly high prices – The prospects of future growth.
Neither of the companies mentioned above have the fundamentals to back up their sky high valuations, but that doesn’t seem to be stopping investors from dreaming.
The potential money to be made “finding the next google” will always blur an investor’s vision. Dreams of money to be made are like the beer goggles of the investment world – Investors immediately begin to make assumptions and ignore obvious risks for a chance to get lucky.
But, one day these investors will wake up and ask themselves “What the hell did I invest in?” [continue reading…]
Why a -7.5% return was one of Warren Buffett’s “Best Periods in History”
July 6th 1962, Buffett writes to those in his partnership:
“During the first half of 1962 we had one of the best periods in our history, achieving a minus 7.5% result…”