Finding a Moat
We look to investment in businesses we understand. Those businesses must have a clear idea of what future earnings will look like, and own a genuine ‘moat’.
For our purposes, a 'moat' means that the company’s products or services possess a real and maintainable competitive advantage, and that the industry in which the company operates is not experiencing a long term downward trend.
A maintainable competitive advantage tends to give firms greater pricing power, which in turn, allows them to hold onto or increase the price of their offering in excess of inflation, without causing a fall in demand. The flow on effect is a more profitable business, and ultimately, a stronger share price.
Wherever possible, we try to stay away from businesses which are not masters of their own fate. We generally avoid commodity type businesses that are dependent on external factors to drive their product and sales.
Industries that we consider commodity type sectors include; the resource, airline and the telecommunication industries. These businesses have little or no economic goodwill and are often only able to differentiate themselves from their competitors based on price. The only outlet for a company of this type to flourish is its ability to compete as a lower cost producer.
However, this is not to say that we will never purchase any companies in the aforementioned industries. From time to time the market throws up a business of this type that is selling at a substantially discounted rate to its intrinsic value. This is usually due to some sort of short term negativity surrounding the company, its industry, or the economy as a whole. If the discounts are large enough relative to our estimation of the company’s intrinsic value, we will extend our analysis, and consider an investment in the business.
In addition to being easy to understand and appearing to have a true competitive advantage, we like to follow Warren Buffet’s methodology and look for businesses that have a long track record, and sell products or services that we believe will always be in need. Furthermore, we like businesses that report above-average return on equity, produce strong and stable cash-flows, require minimal ongoing capital expenditure and have non-existent or very low debt levels (relative to industry norms).
Moreover, we look for companies whose management is competent, upfront, reasonable, and preferably own a reasonable stake in the company - adding additional motivation for great performance.
Finally, our ideal businesses will usually possess one or more unique traits such as a strong consumer brand/s, an unmatched distribution network, operate in an industry or area with little competition or provide a product or service that cannot be easily duplicated.