Trade The Journey

Trade The Journey

Competitive Advantage

Recognize the man in the picture? Well, I’m guessing you would, his net worth is around $40 billion and it does not look like it will be declining anytime soon. Its Warren Buffett. In this picture, he is partaking in one of his favorite activities, eating ice cream. To me, its incredible that the most successful investors do not pick companies based on analytics, forecasting trends, or complex moving advantages, although I am sure its part of their decision

For them, this investment is not just a cash outlay or an expense they plan to forget about. This is an investment into a business, their capital is seen as an investment that can make a company successful. When Warren decided to invest in Dairy Queen, what peaked his interest was not that their financial ratios hit the news or one of his friends notified him about an opportunity to invest.

Warren stopped at the dairy queen for ice cream almost everyday and enjoyed it. He thought to himself, I enjoy this ice cream, they make a great product and the service is good. Then he begin to peak underneath the hood to make sure that the financial strategies match his views of a competitive advantage and almost sure profit.  Interesting note that he has not paid any capital gains taxes and his strategy has worked so well he calls them “Equity Bonds”. Most people including myself do things the other way. We peak underneath the hood first without looking at the car in total. Do you even like the car?

After reading a book about how Warren analyzes financial statements, I saw that he used the financial statements to assess the competitive advantages of the companies. The ratios he used provided clues to the strategies companies used. Were they a company that focused on providing the product or service at a low cost or did they look to provide something unique?

He then begin to ask himself how well the company was achieving their goal in terms of capital structure. Was the company highly leveraged? or did it have enough capital left over from the cost of profits to weather a storm or perform revenue-generating strategies without needing to tap into the debt or equity market? How well did they manage their ongoing fixed cost? Because fixed cost are more important than variable cost when running a company. Fixed costs come rain, sleep, hail or snow.

What kind of ideals did management possess that could further the companies mission and profitability? Does the company have high research cost? How likely is it that another technology or company could uproot the companies a competitive advantage?

It takes years for a company to develop its competitive advantage. Whether the advantage be in cost or unique product offering, an advantage must be apparent and maintained. One way the book mentions as a way to check the advantage is to check the assets of a company. If a company has $79 billion in resources and is operating efficiently, how likely is it that a company could interrupt this advantage?

Creating your own strategies for valuation of a company will help you to identify competitive advantages that you see available. Warren Buffet’s strategy will never completely work for you because you are not Warren Buffet and in order to do what he does, you’d have to think exactly like him. To difficult for me.

I know he’s a billionaire and his strategies work well from. But think about this, Benjamin Graham strategies for investing differed from Warren’s in terms of execution but not in the central idea of value investing. Warren added his own seasoning to a well-flavored soup.

Do you have the courage to do the same? And stick to your own strategy through the ups and downs? Thoughts?

 

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