A Closer Look At Competitive Advantage

Let's take a closer look at the criteria of competitive advantage. As I often find myself investing in companies that I thought have a competitive advantage but don't.

Warren Buffett explains competitive advantage as something like a castle in which many people would like to take over. You want a wide mat and an able baron in that castle to avoid take over. Basing from that analogy we could conclude that competitive advantage is:

#1 - Having Able Managers

Great managers that thinks of the good of the company and its shareholders, major or minor. And does not indulge themselves with glamorous incentives and bonuses. Managers with great track record and with integrity and talent.

#2 - A Solid Product Brand

People will continue to buy a product that they love and care about. A brand that makes them think of quality like Hersheys chocolate rather than chocobot. Jollibee instead of a regular fried chicken and they will continue to pay for the premium just for that brand. Nike, Louis Vuiton  these are just shoes and bags, but people are willing to pay for the premium.

#3 - A Product that's Hard to Imitate

A product or service that is hard to copy. Examples are patents. Coca Cola, even with its competition Pepsi, still can't beat coke because it has a patent. And only coke can use that formula. That's why coke tastes different from pepsi and pop.

#4 - Advantage of Territory and Location

Example of such are businesses that rely on transporting their products. Cement factories, mining minerals etc. Most of their expenses are from logistics / delivery so no people would want to compete with a cement factory from Luzon that is based in Mindanao. Its just not a viable business as the expense from delivering the cement from Mindanao to Luzon will leave them bankrupt. Another example are ports.

#5 - Government Contract

Though with limited time, government contracts are great competitive advantage because its law that gives them the advantage and a limited time monopoly. Example for today are PPP. Though not for the long term, they are great investments for as long as the contract lasts.

#6 - Barriers of Entry

Industry that have big established players and needs a large capital are in this category. Telecom for example.

#7 - There's Something Depressing or Disgusting About the Industry

Example are funeral parlors, waste management and products that caters at human weakness like addiction and vices. Example are gambling, smoking, drinking and gaming. Not necessarily the most respected industry, but are the most profitable.

#8 - People will Need to Buy The Product / Service Consistently

Products that are engraved in each person's lives. Example are bathroom tissue, toothpaste, soap, razor shave, shaving cream etc.

Well, I hope I have listed them all. And I hope I could remember them before I buy another stock. Nobody wants to jump from one company to another. Keeping a tight portfolio, spread to just a few eggs that gives you consistent returns is the way to riches.