There is a popular saying that “If you want to be
successful, find someone who has achieved the results you want and copy what
they do and you'll achieve the same results.”
While this may not be true in all walks of life,
it can definitely work for any investor while choosing stocks for long term
investment. And copying does not mean imitating a successful investor’s stock
portfolio rather it means copying a successful investor’s investment style
while choosing stocks for long term investment.
Successful investors like Benjamin Graham and
Warren Buffett have always used the concept of economic moat before choosing
stocks for long term investment. The concept of economic moat was first put
forth by Benjamin Graham in his immensely popular book ‘The Intelligent
Investor’ which was first published in the year 1949.
So what exactly is a moat?
If you have seen any forts, you might have
noticed a deep ditch around it filled with water with an objective of creating
a primary line of defence. Often these also included deadly animals like
crocodiles and poisonous snakes to deter any potential intruders from
attempting to swim across.
The moat prevented enemies from breaching the
forts easily and helped them survive attacks for longer periods. The same
concept of moat can be used while choosing stocks for long term investment.
To find good stocks to invest for long term investment of 5 to 10 years you need to look for companies with the below
characteristics which give them an economic moat.
Companies with economies of large scale
Companies with economies of large scale can
produce goods at cheaper rate than competitors. Such companies are also have
huge bargaining power with their vendors. Best example of this is Maruti
Suzuki. Being the largest passenger car manufacturer in India it is has a
better bargaining power with its suppliers as compared to Fiat India which
sells the lowest number of cars in India.
Powerful brand recall value
Any company with a powerful brand recall value is
likely to get repeat business from customers thus building up a huge fan base
who not only use the product of the company but are likely to recommend it to
their friends and acquaintances. Examples of companies with powerful brand
recall value include Maruti Suzuki, HUL, ITC and ICICI Bank etc.
Monopolistic business model
If the company is the only supplier of a business
or service it has the advantage of monopoly as there are zero competitors. For
example Coal India which is the world’s largest coal-producing and contributes
to around 82% of the coal production in India.
Business operating in sectors with high entry barriers
Business operating in sectors with high entry
barriers like high initial investment costs or limited government licenses offer
an economic moat to the existing companies and can prove detrimental to new
entrants. Hence such business are ideal stocks for long term investment
Example Reliance Jio invested Rs.150, 000 Crores ($ 22 billion) to build a
fiber-optic network across India to support its 4G technology. This is a huge
investment cost for other telecom companies who wish to compete with Reliance
Jio thus acting as huge barrier for companies who want to enter the telecom
segment and compete with Reliance Jio.
To conclude when you are looking for stocks for
long term investment look specifically for stocks with an economic moat the way
successful investors do.
As rightly quoted by Warren Buffet “In business,
I look for economic castles protected by unbreachable moats.”
