Today I was reading about investment ‘moats’ -
‘The term economic ‘moat’, popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms’ - Investopedia
An example of a ‘moat’ could be it has a patented product and thus has a period of grace before it will have any direct competition. It might be too financially restrictive to copy the business plan to have any real chance of a rival business starting in their field.
What other factors do you think can make a business a lucrative investment?
When investing, capital at risk.
What is the business plan? Is it sound? Is there a market for what the business is offering? What are the profit margins/costs? What is your return on investment? All these factors need to be known before investing. If all these fit into your definition of lucrative, then invest.
A lucrative business should have multiple streams of income or revenue generation. Having multimedia products and services makes it difficult for competition to copy since they wouldn’t know which to focus on. In some cases, the ones which generate the most revenue aren’t the core products eg. Delivery services and repairs.
When producing an investment appraisal, I believe that the financial health of the company, the value proposition of the product/service and the team behind the business are instrumental in the preliminary stock picking process. Macroeconomic trends are equally important.
Looking beyond the aforementioned criteria, I find that investing in companies that show signs of business agility can unlock above-market-average returns in the long run. C-Suites of thriving businesses look beyond short-term profitability and invest in the future. This equally applies for ex-growth companies and it can take many forms. Examples include the development or acquisition of state-of-the-art technology in their respective fields. This can also take the form of creating venture labs to invest in early start-ups for the purpose of sharing intelligence.
Similarly, I find that the culture of the company and employee satisfaction shouldn’t be downplayed. After all, it is employees who are the most valuable assets that come and go through the door each day.
In a nutshell, these are my thoughts. What do the others think?
I think you’ve covered pretty much everything there @RazvanPaun, that’s a nice summing up of the value investing concept. One thing I also think is worth considering is what Warren Buffet would refer to as the ‘Moat’ of a company. In other words, what is it about that company that makes it unique? What is it that prevents another company from coming along and doing what they do, maybe even better? This could be something as simple as strong branding like in the case of companies like coke or Nike, a ‘walled garden’ element like apple who have a situation where once you are using their products it’s difficult (not impossible admittedly) to switch back because of compatibility issues. Or in Microsoft’s case just the sheer amount of money it would take for someone to come along and start seriously competing with them.
That’s my two cents worth
Thank you for your elaboration @Al_Wallace! Surely, the ‘moat’, as defined by Warren Buffet, is comprised under the value proposition of the business - what it bring above and beyond the offerings of competitors that make it special.
I think the above-mentioned criteria are not necessarily limited to value investing. Investing in state-of-the-art technology that becomes market-disrupting tech can yield outsized benefits on the market (Netflix’s transition from rental to streaming is a wonderful example). This closely resembles the attributes of growth investing.