Serious Money: The page on Buffett IV: Durable Competitve Advantage

Given investors anxiousness about the economy and hearing more gloom and doom than I think is warranted, I thought I would get back to basics with "my pal" Warren, and add to the series I started several months ago. I decided to write the series after receiving encouragement from friends and associates that read With Warren Buffett by my side ....

Today, I am writing about the concept of Durable Competitive Advantage, which is the ability to get ahead and stay ahead with a high level of certainty. It is also referred to as Sustainable Competitive Advantage.

To achieve a Durable Competitive Advantage, several factors have to be present. One is a big moat (Buffett expression) surrounding the enterprise. This usually means businesses that sell commodities where price is the primary factor in determining opportunity, have no moat as price takers. Their profit margins are not easily defendable. Another factor is barrier to entry. How easy would it be for someone to enter the same business and compete? The T-shirt business is a good example, of something without a Durable Competitive Advantage. Anyone could enter this business in one day, and they do. So unless the business has some unique concept, it does not have the promise of relatively predictable and sustainable profit margins in the future.

I have written about many companies that I think meet this criteria and if you follow my stories you have already read Volatile Markets: Huaneng Power (HNP) is my pick for the next 50 years and Intuitive Surgical jumps over 32% - where's the ceiling? I hope you can forgive my redundancy in bringing them up so often but HNP is the largest Utility in China, and Intuitive Surgical (NASDAQ: ISRG) is the world leader (and only player) in robotic surgical equipment. Both have huge Durable Competitive Advantages; they are both practically monopolies, and it would take almost insurmountable amounts of capital resources, time, political and intellectual might to try and compete.

Buffett, through Berkshire Hathaway (NYSE: BRK.A) has followed this pattern for decades and in recent years had been buying up utilities and more recently, railroads. BRK has become the largest shareholder of the Burlington Northern Railroad (NYSE: BNI) and has acquired shares of the Norfolk Southern (NYSE: NSC) Union Pacific (NYSE: UNP). Can anyone really imagine starting a new railroad? In your wildest dreams you could not conceive of buying thousands of miles of land and right-a-ways in less than decades. The capital costs would make it impossible for anyone except the government and even with the right of eminent domain this is a non-starter. Mr. Buffett has still got it. And if you want to get it too, then remember his lessons.

The following are the previous stories in the series.

Disclosure: I own shares in BRK.B, HNP and ISRG as of today's date. The railroads are all on my watch list.

To find more potential opportunities and verify my track record read Chasing Value or Serious Money.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He is on the advisory board of internet start-up CircleBuilder.com.

[photo w.marsh]

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