Measuring a Company’s Moat

by JT McGee

Competition makes consumers rich.

Monopolies make investors rich.

The best investments in the world are companies that have an implicit monopoly. Explicit monopolies (think utilities) offer safety, but generate low returns since their profit potential is limited by regulation.

Unregulated monopolies (implicit monopolies or duopolies like Visa and Mastercard) generate ridiculously high returns on invested capital because they have pricing power and limited competition.

How to find rockstar companies

Value investing isn’t about buying what is cheap; it’s about buying a company that has protection from the competition – a moat.

Credit Suisse published a report on measuring a company’s moat, a must-read for any serious investor. It’s long, but the content is central to value investing 101: find a moat, and you’ll make millions.

It harps on what makes a moat, how companies can find a durable competitive advantage, and gives real life examples. Airlines have destroyed value because they have zero pricing power. Home Depot creates value because it has the scale necessary to drive down inventory expenses, which gave it 200bp in margin expansion starting in the 1990s.

Ultimately, a stock should perform as well as the business. Find a good business that is insulated from the competition and you’ve found a great stock.

{ 1 comment… read it below or add one }

The College Investor July 28, 2013 at 11:38

Thanks for highlighting this great read. It totally makes sense to find a wide moat company! I love monopolies!

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