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Equity is one such asset class where the huge money can be made over the time subject to exercising time and patience. The year gone by was very challenging, market has seen huge volatility.
Equity is one such asset class where the huge money can be made over the time subject to exercising time and patience. The year gone by was very challenging, market has seen huge volatility. But why we like such situations is purely because it produces the mouth watering opportunities at compelling prices.
Last year we have recommended 6 uniquely identified companies, these company possess economic moats. These gems were then available at throw away prices. What was unique about these gems were first the sheer valuations at which they were selling. Secondly, the Business model with enormous competitive advantage. Creating wealth out of a gem is sticking with it for a long period rather than timing it for the entry. In bull markets prices tend to move higher very fast so if you try to time the markets you will be at the losing streak.
What is so special about Multibagger stocks?
The most special thing is its MOAT in the business. Buffet explains, “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns.”A powerful worldwide brand is one of the most recognizable economic moats. Successful long-term investing involves more than just identifying solid businesses, or finding businesses that are growing rapidly, or buying cheap stocks. We believe that successful investing also involves evaluating whether a business will stand the test of time.
Wider, Deeper Economic Moat
Sustainable competitive advantages can take many forms, and some companies are better at developing them than others. But more than anything, the principle of sustainability is key to evaluating a company’s economic moat. A company with a wide economic moat is one best suited to prevent a competitor from taking market share or eroding its margins.
Types of Economic Moats
Low Cost Producer: Businesses that can find ways to provide products or services at lowest price, can play this as an competitive advantage in their favour. This helps to undercut their rivals on price. Example is TATA Steel which very competitive steel maker with quality. It has huge iron ore reserves on one side and in house power plant which gives enough competitive advantage to it. This helps the company to produce steel at a very competitive price.
High Switching Costs: This moat has no substitute for it. Businesses which has high switching cost, huge entry barrier because of its systems, complexity etc. example Infosys or any large IT company. The client will not find a better substitute in place, if it find then also there will be scope of loss of secrecy.
The Network Effect: The network effect occurs when the value of a particular good or service increases for both new and existing users as more people use that good or service. It can also occur when other firms design products that compliment an existing product, thereby enhancing that product’s value. For example, wired telephony where the network effect has made Airtel India’s biggest mobile service operator.
Intangible Assets: Intangible assets generally refer to the intellectual property that firms use to prevent other companies from duplicating a good or service. Of course, patents are the most common economic moat in this category. Example McDonalds, Pepsi, Coca Cola etc.
While evaluating the economic moats we look for the financial statements with above average returns profile, large market share. We spend lot of time rating companies on economic moats. Talking to their managements, suppliers, vendors and end consumers we get the enough data to support whether there is any existence of an economic moats, and if yes its sustainability.
Dr Equity’s List of Moats
We recommend companies with such enduring moats. That why we only recommend 6 companies a year to maintain the quality. Our recommendation have so far justified all our reasons. You can decide which way is the right but this generations old formula practiced by Mr. Buffet also is worth noticing.
Our Publicly available reports:
Cera Sanitaryware Ltd
Care Ratings Ltd
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Team – Dr Equity
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