Warren Buffett and a durable competitive advantage166 views 2012-10-21 22:23 Tags: Warren Buffett Stock Who Intrinsic Value How Invest like Money Forum
Warren Buffett states that any business that enjoys a durable competitive
advantage is likely to have a long history of profitability that is based on a
narrow range of products or services. A company that has a competitive
advantage is likely to remain in the industry for the foreseeable future. The
fact that the organizations products are profitable would mean that their
spending on research and development would be minimal whereas the company would
also not be in need of continuous up gradation. Furthermore, a company that
enjoys a high competitive advantage is likely to offer a product that has a
rising or stable pattern of demand.
Any company that enjoys a high competitive advantage is likely to be in a
monopolistic position within the market. This is because its unique products
and services are likely to generate sales due to their high quality and
distinct image. This allows the firm to increase prices while still maintain
profitability and sales. This is of immense importance to shareholders as
increasing sales and returns signal higher returns for the stock owners as per money forum. Furthermore,
competitive advantage allows a business to refrain from entering into price
battles with other competitors and the company is able to dominate the market.
The competitive advantage allows the firm to lead the market and generate high
profits from the stable product line. Finally, the fact that the business has a
durable competitive advantage would mean that it would be able to maintain the
current earnings per share in the foreseeable future.
So how exactly is the durable competitive advantage beneficial to
investors like Warren Buffet? Warren Buffet states that any company that enjoys
a sustainable competitive advantage is likely to invest a minimal amount into
research and development and new plant and equipment. This would free up cash
for other investing purposes such as expansion that would allow the business to
increase its sales and profitability. The availability of cash is also likely
to prevent the company from taking on debt and incurring the cost associated
with servicing of debt. A company that enjoys a durable competitive advantage
is likely to have high amounts of free cash flow which could be passed on to
shareholders in form of high return on equity.