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.”
-Warren Buffett 1982 shareholder letter
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:
2 Preferreds That Offer Upside Potential And Decent Yield – New Seeking Alpha Post
I have been enjoying having a little more time to look at individual stocks and securities lately. Writing about them helps me think a little bit clearer, and go into more detail. Here is another article I wrote for Seeking Alpha on a couple of preferred shares from DowDuPont (Ticker: DWDP) that are unique: [continue reading…]
What Stocks Would Ben Graham Buy Today? Q1 2017
It’s a new year, and a new quarter! That means it is time to run our Ben Graham Value Screens again and see what companies have made the cut. [continue reading…]
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…]
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…]
Evaluating Stocks with a Competitive Advantage – Warren Buffett’s Concept of an “Equity/Bond”
When a company’s earnings are so solid and so predictable, investors are able to think of their stock like a variable fixed income security, like a bond with flexible rates. Here is how investors like Buffett evaluate these special companies. [continue reading…]
10 Questions to Ask Before You Buy Your Next Stock
How do you determine whether a stock is a worthy long term investment? Here are a few questions to ask yourself before you make that next purchase. [continue reading…]
Investing Book Series: Competitive Strategy Chapter 2. Strategies to Outperform
In this series we look at investing lessons from some of the classic investment books out there and apply those lessons to today in order to spot potential investment opportunities. Today we look at Chapter 2 of Michael Porter’s book: Competitive Strategy: Techniques for Analyzing Industries and Competitors, where he evaluates the 3 generic strategies companies use to outperform in an industry. [continue reading…]