Find Winning Stocks with Warren Buffett’s Secret Weapon – A Durable Competitive Advantage
Every day millions of stock traders are looking at stock prices, stock trends, company balance sheets to figure out how to find winning stocks to trade. It is not so easy to do and often times using this data forms no more than a hunch which can be financially disastrous. So how do you avoid this trap? Some experts believe in selecting stocks that have a high Durable Competitive Advantage.
What is a so called Durable Competitive Advantage (sometimes referred to as Sustainable Competitive Advantage)? It is when a unique new technology or technique is discovered by a company whose rights are protected in such a way that no other company will be able to duplicate it, match its price point, or acquire the use of the technology for the foreseeable future. Often times this is the result of such things as patents and trademarks, and in turn assures that the company’s stock has a higher than normal chance to increase in value and produce better than average shareholder earnings over a long period of time. It is more often than not associated with progressive smaller type companies because larger heavily capitalized companies are expected to do these types of things on a routine basis by those that invest in them.
1. Make sure it is a sustainable product or service that restricts entry into the company’s niche market in regards to competition. Be aware of ‘value traps’, which are companies that will do well over a short period of time and then drop off quickly only to have their stock prices tumble quickly backwards. This is indicative of innovative companies who can have matching or comparative products or services competing against them in a very short time. Their stock share growth is therefore not ‘sustainable’.
2. Look for a company that has concretely identifiable pieces of intellectual property or a service that will lead to them being able to obtain a copyright, trademark, or any other type of intellectual property protection that a company can put its stamp on exclusively for a long time to come. Once again, exclusivity creates a huge durable competitive advantage.
3. The same holds true for a product as far as being durable and sustainable. It must be very unique and a tough to duplicate product that can ultimately be patented and get the 20 years of solitary manufacturing rights protection that comes with that. It is even better if the breakthrough product can be further developed into a product line that continually reinvents the wheel so to speak. A good example of this is the several models of Apple’s (NASDAQ:AAPL) iPhones. Unique products are generally easy to patent and hard to duplicate without infringing upon that patent. It also must not be linked to raw materials used in its production that are in short supply or might someday be expensive to obtain; this would not make it a sustainable product, especially if its price point was the selling point. Of course it may be a product that the exact opposite is true and has a great amount of durable competitive advantage if it is one that has special access to scarce resources or supplies.
4. The product, service, or manufacturing process a company is marketing creates a very dramatic savings over any other currently competing product or existing technology. This cost savings alone will bring a tremendous amount of business the company’s way and it will have the unintended effect of also limiting their competitors’ funds from sales to create competing products, services, or processes.
5. The resulting brand name virtually locks up the customer base or niche market for the product or service for the foreseeable future. If the customers have no other source to turn to for a product, technology, or service that has a high demand, then that guarantees a large amount of sales until someone manages to penetrate their market.
6. What the company is offering must have a very specific focus and is very easily identifiable and differentiated from anything else that is out there currently. This once again tends to lead toward guaranteed sales over an extended period of time.
7. The company, service, process, or brand is backed up by a team of talented professionals, marketers, designers, inventors, governmental supporters, or any other key personal that relates to its field of focus; that once again points toward durable and sustainable sales in the marketplace for it.
If you’re trying to figure out how to find the best stocks to trade, the kind of stocks that can generate powerful, lasting price trends, then look for these identifying markers for a durable competitive advantage. There is a reason that billionaire investor Warren Buffett focuses so hard on this key indicator because it is the single-most important factor in generating high returns. Combine this with other fundamental and technical factors, and you will start to develop the ability to separate the big winning stocks from the average performers.
Zwiller, Martin (June 2010) Business Insider. The 6 Keys To Real Sustainable Competitive Advantage. Retrieved August 17, 2014 from http://www.businessinsider.com/the-6-keys-to-sustainable-competitive-advantage-2010-6/real-intellectual-property-1
Equibond Theory. Durable Competitive Advantage. Retrieved August 17, 2014 from http://equitybondtheory.com/durable-competitive-advantage
Shray (September 2012).Value Pickr. Business Models with Durable Competitive Advantage. Retrieved August 17, 2014 from http://www.valuepickr.com/forum/the-investors-edge/394471247