On 17th January, 2016, I got an opportunity to address one group of investors. I am so thankful to all my friends who provided me such an opportunity.
Investor Philosophy – Pat Dorsey
This presentation (Click here Pat Dorsey) based on what I learned from Pat Dorsey and about his philosophy.
Company A earns High profit / High Return on Capital that attracts many players to the same industry; which resulted to higher level of competitions. Higher competitions affects to the margins of the company A and continuously increasing competition affects to the earnings of the company A. and if company A doesn’t having any Competitive Advantage then business of company A can be in problem.
So question is what is competitive advantage?
Now, let me explain with a simple example that how USP helps.
Above all are benefits of having a strong USP of Rajinikanth. Now, compare these benefits to the business class.
So before understanding, what is competitive advantage? I explain what can not be a competitive advantage?
If company cannot able to raise price of the products / services then we should understand that there is an absent of competitive advantage. (Eg.: – ITC Ltd. – Budget imposes duty on cigarette but company easily able to pass those costs to the customers and that’s the reason of survival of the company in adverse situations.)
We can easily able to recall brands. Meggie is becomes synonyms for noodles, Fevicol is becomes synonyms for adhesive, and Colgate is becomes synonyms for toothpaste.
Also company which having ability to change consumer behavior that Amazon have done (From traditional book store to online book store).
Patents & Licenses can be useful for protecting interest of business (not considering strong moats because after expiry of patents other companies also can able to register it and licenses can fall in the compliance risk).
Any psychological barrier or any cost associated with switch from using current product / service to other product / service.
As addition of new users make network more and more strong and replicating such model becomes very difficult.
Low cost producer compare to other players in the same industry.
Wide and strong moat resulted to the long term Return on Capital generation and if absent of moat not able to provide long term Return on Capital to the business.
Bad managers destroys business for own enjoyment and ambitions.
Now, what to select and what to avoid is up to us. If we able to select good business with good manager then wealth creation become more effective. That is like good horse with good jockey that can able to win race.
Inspired by — Pat Dorsey Moats
Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.