Identifying and investing in companies/businesses with Durable Long Term Competitive Advantage is an old investment strategy used by the world’s most respected investor – Warren Buffet.
This was after he noticed that businesses with competitive advantage benefited from monopoly-like economics that allowed them to sell more or charge more for their services or products.
The competitive advantage of companies, he further noted, ensured that the underlying value of such businesses increased year after year provided the business continued to maintain its competitive advantage.
The Washington Post Newspaper is one company Warren Buffet identified as having a competitive advantage in 1973 and as such invested $11 million into the newspaper company.
At the end of 2004, his investment in the company had grown to $1.7 billion (15,354% increment in investment value) attributable to the ‘durability’ and ‘long-term’ nature of the company’s competitive advantage.
The concept of Durable Long-Term Competitive Advantage simply has to do with a business’s ability to record consistent growth in selected key financial indicators over a long-term period where the ‘long-term period’ is ten (10) years and above.
The consistency in the growth of the selected key indicators is what gives the sense of ‘durability’ of the company’s competitive advantage.
To identify and ascertain if a company/business has a Durable Long-Term Competitive Advantage, one must refer to the financial statements of the company carefully analyzing its Balance Sheet, Income/Loss Statement, and Cashflow Statement over at least ten years.
In this ten part weekly series, we will critically examine the financial indicators that qualify a company or business to be classified as having a Durable Long Term Competitive Advantage.
For the Income/Loss Statement (Part II – IV), we will examine the following indicators;
- Gross Profit Margin
- Interest Payout
- Net Earnings
For the Balance Sheet Statement (Part X – VII), we will examine the following indicators;
- Cash or Cash Equivalent Generation
- Long Term Debt
- Shareholder Equity / Total Liabilities
For the Cash flow Statement (Part VIII – IX), we will examine the following indicators;
- Net Annual Earnings Spent on Capital Expenditure
- Annual Shares Buyback
The last part (Part X) will be the conclusion of this weekly series and will focus on the benefits of investing in companies with durable long-term competitive advantage and why it should be a “new” investment option for investors.
The writer has certifications in Wealth & Investment Management as well as Investment Advice and Portfolio/Fund Management from the Chartered Institute for Securities & Investment (CISI, UK) and the Ghana Investment and Securities Institute (GISI) respectively.
Comments and views can be sent to the writer via the email address firstname.lastname@example.org