In our last column, we learnt the importance of owning companies that have powerful brands that are loved by their customers. The legendary investor Warren Buffet used to liken such companies to medieval castles with wide moats. The stronger the brands owned by a company, the wider the moat. Castles with wide moats are more resilient to enemy attacks.
Invincible
In fact, the best companies not only have wide moats, but several crocodiles swarming in the moat. Have you ever wondered why pretty much two companies control the Cola market? The world over, when people think of a Cola, they think of either Pepsi or Coca-Cola. Some markets may have a small third brand like “Thums Up” in India, but beyond that the competition does not exist.
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But things can change with even the most popular companies and market leaders. Ten years ago, the Finnish company Nokia was the market leader in mobile telephony. Yet today, Nokia stands humbled by Samsung and Apple, who were not even manufacturing mobile phones 10 years ago! Apple, a computer manufacturer launched the first iPhone as recently as 2007. Nokia had to sell its phone business to Microsoft. This is particularly true in the technology sector where the rate of change is high.
We as investors need to identify companies with wide moats that can stand the test of time. This will help us eliminate around 90 per cent of the stocks available for investment in the stock exchanges. Our short list has become really short from a long list over 1,000 stocks!
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