Durable Competitive Advantage (DCA) is certainly a hidden wealth and a valuable quality for any company to possess. Mr. Warren Buffet company selection process is based on this concept through which he identifies and isolates these companies and invest in them when their prices are falling and historically cheap.
Mr. Buffet selects the companies which have a durable competitive advantage in the market. This is the main pillar of his investment wisdom. Nowadays, investors are applying a growing number of excellent investment methodologies and great hedging strategies to enhance their investment return and manage their risk. But investing strictly in the companies which possess “DCA” in the market when their share prices are falling is a profitable investment strategy and works forever in every market around the globe.
This approach cleverly selects the best companies to invest at the time when their share prices are falling. Mr. Buffet is acting on his teacher advice “Ben Graham” who believed that there was not such a thing as good or bad stock. a share is either expensive or cheap and "value-investing" is all about buying the undervalued stocks.
However, competitive advantage must be durable and last for many years as Coca-Cola or Hershey has been selling the same products for the last half a century. Their products have not changed and are not expected to change in the future because they own a piece of the consumer’s mind. These companies could grow without spending large sums of capital for the machinery and/or R&D to stay competitive. Warren says investing in the “low- cost” producers with durable competitive advantage are profitable and safe if one buys them in the bear market.
Warren believes that investors should not invest based on the belief that a company is going to grow and change the market. Instead, they should focus on the companies with “low cost durable competitive advantage”. He targets the low-cost companies that produce unique products or services that people need them repeatedly. Brand names, fast foods, advertising, cleaning, credit cards, big retailers’ industries are among them.
A brand name or regional monopoly is considered a competitive advantage that enables a company to control the price of its products and services due to its monopolistic position and earn steady increasing profit. Coca-Cola, Hershey, H&R Block, Visa, Walmart, Costco are some examples of such businesses
The certainty of the outcome is the cornerstone of Mr. Buffet's philosophy. He is a “selective contrarian investment strategist who identifies and selects the companies with durable competitive advantage and then he waits for the right time to invest in them. The right time to buy for a contrarian is when the prices are falling which happens in an in a bear market, a correction or a panic sell-off during a bull market.
The investor might successfully identify many companies with "low-cost" durable competitive advantage, but he must be very cautious not invest in them unless their share prices are falling and look historically cheap.
Short sellers generally avoid these companies because of their strong business economics and take a contra Buffet approach to draw a shorting strategy. A contra approach is a two-step approach:
First, the short seller looks for the companies with Price Competitive Disadvantage in the industries such as manufacturers, airlines and so on and specifically identifies the less known companies that their products or services are not unique and not considered a certain need for the public.
And at the second step, he monitors and waits for the market and/or the identified stock prices to fall. Generally, the best time to short is the last stage of the bull market when the share prices are historically and irrationally inflated. Shorting the selected stocks solely when their prices are historically expensive is the key to the certainty of the outcome.
May 01, 2018
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