Understanding competitive advantage through market power
Sustainable competitive advantage. It is what we’re all ultimately seeking as investors. Often called a moat, it is what allows a company to make higher profits year after year and not see those profits eroded away by competitors.
Without a sustainable competitive advantage, something that allows you to make superior rates of return on money invested, your rate of return will trend towards the median for the industry. So our challenge as investors is to find those companies with sustainable competitive advantages. That is what this article seeks to do by understanding the dynamics of a market – looking at which companies have market share, how concentrated a market is and how pricing power is distributed through the market.
The author of this article, Michael Mauboussin, is one of the biggest names in investing research. Before working at Morgan Stanley, he worked at Credit Suisse, Legg Mason and BlueMountain Capital and is an adjunct professor of finance at Columbia Business School. So while this article does get a little dense at times, it is written by one of the best investing minds of a generation – so it is worth persevering.
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