{"id":1246,"date":"2018-05-02T10:00:56","date_gmt":"2018-05-02T04:30:56","guid":{"rendered":"https:\/\/www.moneyworks4me.com\/investmentshastra\/?p=1246"},"modified":"2020-08-28T17:14:19","modified_gmt":"2020-08-28T11:44:19","slug":"stock-shastra-4-look-for-companies-with-unbreachable-moats","status":"publish","type":"post","link":"https:\/\/www.moneyworks4me.com\/investmentshastra\/stock-shastra-4-look-for-companies-with-unbreachable-moats\/","title":{"rendered":"How to Choose Good Stocks to Invest in?"},"content":{"rendered":"

Invest in a company stock that you want to own forever<\/span><\/h2>\n

As we said earlier, buying a stock expecting that it will grow in value for years, and therefore holding it for a long time is an investment; everything else is speculation. When you invest in company stock, you have to be confident that you are going to own it forever. This is the best way to ensure that you will invest in the best. Now, what kind of companies will qualify as investment-worthy and how do you identify them?<\/p>\n

If you are currently investing in stocks, what is the method you use to select stocks? Is it low P\/E, low Price\/Book Value, High Dividend Yield?\u00a0 These methods oversimplify investing and hence are inadequate. They don\u2019t tell you about the earning capacity of a company \u2014 the key driver of its stock price in the long term. They may lead you to take a wrong decision.<\/p>\n

The fact is that, in the short run, market sentiments drive stock prices up or down, irrespective of whether the stock is wonderful or not. But in the long run, the price of any stock is driven by the company\u2019s ability to consistently earn profits.\u00a0 And a company can earn profits consistently only if it has a wonderful business \u2014 a business which has done well and will continue to grow in the future.<\/p>\n

Great businesses have one essential characteristic: they have a Sustainable Moat<\/strong>\u00a0<\/em><\/span><\/h2>\n

In olden days, a castle used to be protected by a moat \u2014 a wide channel dug around a castle and filled with water. The wider the moat, the more difficult it was for enemies to enter and capture the castle.<\/em> For you, the castle is a company you want to invest in. And the moat is\u00a0a sustainable competitive edge\u00a0<\/strong>which protects the company from the competition and tough economic conditions! During tough times, companies fight harder to win customers, which usually leads to a fall in prices, and thus, margins. Only a company with a wide, unbreachable moat \u2014 a competitive edge \u2014 can maintain and grow its profits even during tough economic conditions.<\/p>\n

\u201cA good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable\u201d – Warren Buffett<\/em><\/strong><\/p><\/blockquote>\n

\"Avoid<\/a><\/p>\n

What would qualify as a real competitive edge, a moat? <\/strong><\/span><\/h2>\n

If you had to buy toothpaste, which name comes to your mind? Most of us would think of\u00a0Colgate<\/em><\/strong>, and many of us would buy it. Why? Because this is a name many in India have come to trust over the years. It is quite easy to make toothpaste, maybe even better than Colgate, but without the Colgate brand name, you will sell very little in India. This is the power of the\u00a0Brand \u2013 the first moat<\/a>. A strong brand helps a business to command a large market share and higher prices and makes it very difficult for competition to grow. Read more on this Moat<\/a><\/p>\n

Wouldn\u2019t we love to own a company that was the only one who could manufacture a particular product and had no direct competition? That is exactly what happens if a company has a\u00a0Patent or a Trade Secret \u2013 the second moat<\/a>.<\/strong>\u00a0The most common examples: pharma companies with patents, and food and beverages companies with unique and usually patented recipes like\u00a0Coca Cola and McDonald\u2019s fries <\/strong>(which are made from specially grown potatoes!)<\/em> Read more on this Moat<\/a><\/p>\n

We use expressways\/highways for hassle-free travel \u2014 fast, safe and comfortable.\u00a0 And we have to pay a toll for using it, but we still prefer it. Wouldn’t you love to own a business that makes money every time someone uses it, and people have no option but to use it? Some companies have exclusive control over particular areas. That gives them the ability to collect a\u00a0Toll \u2013 the third moat<\/a>. For example, If you want to advertise a product in South India on a television network, you would have no option but to advertise on\u00a0Sun TV<\/a>, because of its very high viewership. Google AdWords is another example of a toll moat \u2014 you can\u2019t reach people searching for something on the net without using Google AdWord because Google is the most popular search engine used by people! Read more on this Moat<\/a><\/p>\n

We are all creatures of habit. We do not like to change, especially, if the change requires a little bit of effort. The\u00a0fourth moat<\/strong>\u00a0that a company can have is based on this and is called\u00a0Switching costs<\/a>.\u00a0 It means a company has a product or service you are so used to, that changing or switching it is either very difficult or not worth it. Examples are\u00a0Microsoft Windows <\/strong>and\u00a0Microsoft Office<\/strong>. We are so used to them that changes to, say, Linux is not worth it for most people \u2013 even though it is free and offers certain advantages over Windows. Indian IT companies get most of their business from repeat client\u00e8le because of this very moat. Read more on this Moat<\/a><\/p>\n

One of the biggest factors on which companies compete on is\u00a0price – the fifth moat<\/a>. A company which can price its products very low and still makes a profit makes it difficult for the competition. For example, consider\u00a0D-Mart<\/strong> (Avenue Supermarts Ltd.<\/a>); its strong retail network and value retailing format combined with its large scale of operations enables it to offer good discounts on products. Read more on this Moat<\/a><\/p>\n

So, the five types of moats that a company can have that can stand the test of time are\u00a0Brand, Secret, Toll, Switching Costs and Price.<\/strong> A company can also have other moats like network effects, distribution network, etc.<\/p>\n

What else is essential to qualify as a great business that is investment worthy?<\/strong><\/span><\/h2>\n

In addition to a sustainable moat, two things are required:<\/p>\n

    \n
  1. An Excellent Financial Track Record over 10 years<\/a>:\u00a0<\/strong>Why 10 years? Because over a 10-year period, the company is likely to have experienced one full economic cycle \u2014 good and bad times; growth and recession. A business does not do well over a 10-year period just by accident! A company which has performed well over a 10-year period is most likely to have a moat.\u00a0But does it mean that past performance is a guarantee of future performance? No, there are no guarantees, because the world is experiencing a high rate of change and disruption.\u00a0 But the past performance and past behaviour of the Management give a very good indication of its future prospects. You need to understand how to look at the financial track record and separate the best from the rest. Read more>><\/a><\/li>\n
  2. A respectable Management is a critical go-no-go criterion for investing in a company<\/a>: Promoters and top management have to pass this test with flying colours. Because they run the company, they report the results and disclose information, and if there is any doubt about their honesty, you should completely avoid investing in companies run by them. Find clues and pointers to help you identify management that is trustworthy and respects interests of minority shareholders like yourself. Read more>><\/a><\/li>\n<\/ol>\n

    To Summarise:<\/strong><\/p>\n

    While investing in stocks, look for companies which have a sustainable competitive edge, i.e. a Moat. There are five types of Moats: (1) Strong Brands<\/a> (2) Patent or a Trade Secret <\/a>\u00a0(3) Ability to charge a Toll<\/a> (4) High Switching Costs<\/a>\u00a0and (5) Low price<\/a>. In addition to these Moats, look for (6) Excellent Financial Track Record over 10 years<\/a>\u00a0and (7)\u00a0Trustworthy Management <\/a><\/p>\n

    Let\u2019s understand each moat better.<\/p>\n

    \u2018Moat-1: Great Brands are an unbreachable moat<\/a>\u2019<\/span><\/p>\n

    If you liked what you read and would like to put it in to practice Register at MoneyWorks4me.com<\/a>. You will get amazing FREE features that will enable you to invest in Stocks and Mutual Funds the right way.<\/p>\n

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    Invest in a company stock that you want to own forever As we said earlier, buying a stock expecting that it will grow in value for years, and therefore holding it for a long time is an investment; everything else is speculation. When you invest in company stock, you have to be confident that you […]<\/p>\n","protected":false},"author":17,"featured_media":13054,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[1152,1179,1151],"tags":[81,1142],"modified_by":"MoneyWorks4me","_links":{"self":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/1246"}],"collection":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/users\/17"}],"replies":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/comments?post=1246"}],"version-history":[{"count":0,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/posts\/1246\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media\/13054"}],"wp:attachment":[{"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/media?parent=1246"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/categories?post=1246"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.moneyworks4me.com\/investmentshastra\/wp-json\/wp\/v2\/tags?post=1246"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}