Infrastructure Resized

Where to invest in the current market environment?

If I gave you $1 trillion, but the deal was that you had to use these funds to start a business and compete against a publicly listed company, which companies in the world would you absolutely not want to compete against? Who is just so powerful that you wouldn’t even try, or maybe you would try, but it would take you decades to make a dent in their market share?

When deciding where to invest, it's crucial to consider companies with robust competitive advantages. Warren Buffett has a great analogy: “these companies are like a big castle, with wide moats and monster crocodiles in them - making it very hard for anyone to attack them.” These are the types of businesses we aim to invest in, as they tend to offer sustainable growth and high returns over the long term.

Monopolies, duopolies, and oligopolies

Peter Thiel famously said, "Competition is for losers." To create and capture lasting value, one should seek to build or invest in monopolies.

ASML: This company sits on the top of the supply chain for semiconductors. Nobody in the world can do what they do. They sell the massive machines (the size of double decker buses and cost 350 million EUR per machine) to Samsung and TSMC. What they do is so difficult, it’s like driving from Durban to Pretoria and being half a meter off, it won’t work.

It has taken them 30 years to build the technology they have developed today. Japanese tried in the 90s and gave up as they thought it couldn’t be done. No competitor has the time, resources, or knowledge to catch these guys. They are a monopoly.

Visa: You could call Visa the toll booth between the shopper and the merchant. Instead of going to the shops and buying something with cash, if you pay with your bank card or even if you purchase something online, it’s either Visa or Mastercard that are enabling you to purchase your goods via your bank account. Visa & Mastercard operate in a duopoly.

S&P Global: Is one of 3 major ratings agencies in the world. Moody’s and Fitch are the others. These three ratings agencies have a long history and established reputation, making it difficult for new entrants to come and take market share.  S&P Global was founded in 1860. More than 150 years old.

Network effects

Reid Hoffman, the founder of LinkedIn, describes network effects as the phenomenon where a product becomes more valuable as more people use it. For example, platforms like Facebook, Alphabet, and Amazon become more attractive to advertisers as their user base grows. Although not in our portfolio, Uber is a classic case: the more people use Uber, the more drivers it attracts, and vice versa.

High switching costs

Companies that create high switching costs can effectively lock in their customers.

“Imagine if Sasfin CEO emailed everyone saying Microsoft announced a price increase of 10% overnight, it’s too much, we are moving to Linux. There would be absolute chaos.”

Stryker: A leading medical technology company, Stryker's products are deeply integrated into hospital systems.

Here is a scenario: “A patient was in a horrific car crash. Very, very badly injured, her left leg was shattered in multiple places, and her right leg amputated at the scene of the accident. She was airlifted to the hospital. The trauma surgeon can’t really plan ahead as patients come in and surgeons need to figure out what to do very quickly as every second counts in the trauma theatre. The surgeon called the Stryker Trauma consultant (who is regularly in the trauma theatre with surgeons) who gave guidance on product options, including screws, the length of the implant and plate selection. This information was given quickly so that the surgeon could begin surgery immediately.”

Surgeons rely heavily on Stryker consultants for quick, critical guidance during trauma surgeries. Switching to a new provider would require extensive retraining and adjustment, making it a daunting task. If you are a surgeon in the Stryker ecosystem. It’s difficult to move. This is a great example of high switching costs.

Luxury goods

Luxury goods companies all have something in common rich heritage. It takes decades to build strong brand identity and element of scarcity. You can’t flood the market with thousands of products to make revenue as you won’t be a luxury player anymore. You have to have that exclusivity. You can only sell a limited number of Ferraris or Louis Vuitton bags to ensure the exclusivity of the brand remains.

Ferrari was formed in 1929. Almost 100 years old.  In their history, they have only sold 250 000 Ferraris. Porsche sold more cars last year than Ferrari has in their entire history.

LVMH was founded 1854. It has taken them more than 150 years to get to where they are today. If you want to take them on, be prepared to fight for 150 years!

So, investing in companies with strong competitive advantages ensures that they can continue to grow and reinvest in their business, compounding their earnings over time. These companies excel at keeping competition at bay, making them ideal long-term investments.

I hope this gives you an idea of how we think. If this investment philosophy resonates with you and you'd like more information, please reach out to us. We are here to assist.

About the Author

Andrew Padoa
Branch, Portfolio Manager, Sasfin Wealth

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