Picking Stocks with Competitive Advantage

By Ken Little

Picking great stocks is really about picking great companies if you are investing for the long term.

The question every long-term investor struggles with is how do you know a company is going to be a good long-term investment?

The company may look good today, but experience tells us that today’s leader can become tomorrow’s also-ran.

No Guarantees

Unfortunately, there are no guarantees in investing.

Companies that were rock-solid a generation ago are now struggling for survival.

So, how does an investor pick a great company that will still be great in the future?

You should consider a number of characteristics, but one qualification is the most important.

Does the company have a long-term, competitive advantage?

The Moat

Many investors refer to this as “the moat” and it represents a barrier to competitors.

This moat or barrier can take several forms such as being a low-cost provider, there being a high cost to enter the market, making it difficult or expensive for customers to switch, and so on.

Wal-Mart is an obvious example of a company with a moat or competitive advantage.

With over 5,000 stores, it has tremendous buying power and can negotiate attractive deals with suppliers. The company can take advantage of distribution systems that are most efficient.

It gets tremendous exposure for its national advertising because of the large number of stores.

Top Position

Wal-Mart’s position as the top retail chain is unapproachable in today’s market.

But, what about 10 or 15 years from now? Will shopping patterns and tastes change? Will the increasing price of fuel hurt sales?

There’s no way of knowing what will happen to any market leader in the future.

Your best course of action is to always invest for the long term, but understand that the best a company may be able to give you is less than you need from now until you retire.