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Mots or market power? | CFA Institute Enterprise Investor


“The key to investing is not in evaluating how much an industry is going to affect society, or how much it will grow, but in determining the competitive advantage of any company and, above all, the sustainability of that advantage. Rewards for investors are products or services that have a wide, durable groove around them. – Warren Buffett

In the investment world, we have a notch, or some form of long-term competitive advantage that is difficult for competitors to overcome.

Why do we hear so much about this idea? A big reason is that Warren Buffett likes to talk about it, so a lot of people have tried to figure out exactly what he meant by a notch. After all, there is really no way to measure the concept: it is a qualitative metric that is impossible to predict in most cases.

A notch could be a powerful brand উদাহরণ for example কো Coca-Cola or Disney অথবা or it could be an intellectual property, say, a patented drug from a pharmaceutical or biotech company.

But maybe we have always focused on the wrong metric.

Instead of looking for mining, we should look for market power. “On the power of mutual fund betting”, Stefan Jaspersen recently explored the question of whether companies have the advantage of having less competitive products. Using a database of product competition among U.S. companies, he showed that companies with less product competition are followed by older, higher appraisals, less liquidity, and fewer analysts.

In short, they are mostly small to medium-sized companies operating in the niche of small markets where a few highly specialized companies compete with each other. Since these niche markets are not widely followed by investors, there are some analysts keeping in touch with their companies. As a result, news of what is going on in such markets travels slowly.

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For all these reasons, companies with fewer competitors should be prepared to return higher share prices in the long run. Nevertheless, the study further found that from 1999 to 2017, firms with little market power returned virtually the same from their high market power peers. But fund managers who have invested in higher-market power companies have surpassed 1.56% of actively managed equity funds each year on average.

How is this possible? The strategy is that market power is not stable. The number of competing products varies all the time. Fund managers who are aware of a company’s market power because they monitor the competition and efficiency by which a company turns research and development investments into actual sales, for example, if a company’s market power is high or grows and sells it Or decreases.

In fact, fund managers are investing in companies that operate in less efficient markets with fewer competitors and thus have the potential to gain a large share of the market and increase their profit margins. And it creates an advantage for fund managers independent of the fund style.

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And who do these fund managers consider market power? On average they are older and more experienced. And I suspect they’ve learned to focus less on crises and other vague and fleeting ideas in their careers and instead focus on how close a company is to its exclusive niche in its particular niche.

The less competitors the better.

Be sure to learn more from Joachim Clement, CFA Geopolitics: The interaction between geopolitics, economics and investment, 7 Mistakes Every Investor Makes (And How To Avoid Them), And Risk profiling and tolerance, And sign up for it Clement on investment Comment

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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed must not reflect the views of the CFA Institute or the author’s employer.

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Joachim Clement, CFA

CFA Joachim Clement, a trustee of the CFA Institute Research Foundation and provides regular commentary here Clement on investment. Previously, he was the CIO of Wellarshof & Partners Limited, and before that, the head of the UBS Wealth Management Strategic Research Team and the Head of Equity Strategy at UBS Wealth Management. Clement studied mathematics and physics at the Swiss Federal Institute of Technology (ETH), Zurich, Switzerland and Madrid, Spain, and earned a master’s degree in mathematics. In addition, he holds a master’s degree in economics and economics.



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