Wildly successful long-term investors Warren Buffett and Charlie Munger have commonly stated how they believe one of the most important qualities to look for in a high-performing company is a moat. By this they mean that the company has some sort of competitive advantage above others that lets it consistently grow profits over the long term.
At the end of the day share prices will follow earnings higher or lower over time, so if a company's 'moat' can help it grow profits over the long term it's likely to be a good investment.
It doesn't really matter how or why its 'moat' exists, just as long as it does.
So let's take a look at three businesses that may have moats to make them good investments.
Sydney Airport Holdings Ltd (ASX: SYD) has a moat via its monopoly-like status on air travel in and out of Sydney. As a monopoly it has some pricing power in what it can charge for car parking for example as passengers have no alternative other than to pay up if they want to park. Airlines also cannot decide to fly somewhere else just because they don't like the fees.
The proposed second airport at Sydney's Badgerys Creek is a factor, but is only coming about as the existing airport is reaching capacity with rising demand and traffic.
Sydney Airport shares are up from $2.50 in September 2009 to $8.24 today while paying very healthy dividends along the way. As such we can see it might be a good long-term bet.
REA Group Limited (ASX: REA) also has a moat via its strong competitive position as it only has one real rival in Domain Holdings Australia Ltd (ASX: DHG). Any business that operates in a duopoly is in a relatively strong position.
REA's dominant position comes about due to the network effect where property sellers or landlords want to be sure their properties are viewed by the maximum possible buyers or tenants. This network effect in turn gives REA Group some pricing power.
Finally, its majority ownership by News Corp (ASX: NWS) also increases its traffic reach as it can advertise more readily across News Corp's huge variety of media platforms. It would be almost impossible for a start-up challenger to disrupt this kind of entrenched dominance given the funding requirements and media reach required. The stock is up from $7.20 in Sept 2009 to $105.10 today.
Facebook Inc. (NASDAQ: FB) is another business I'm keen on as an investment due to its network effects, strong profit growth, epic balance sheet, and reasonable valuation. Facebook Inc. is the founder-led business behind Instagram, Facebook, WhatsApp, Messenger, and Oculus VR, among other projects.
It's possible that Facebook's social network and its grip on targeted online advertising are shaken by a rival one day, but I'm not holding my breath. To me the stock looks good value at US$190.90 and just the kind of a business a Gen Y Warren Buffett might love.
