Easily Pinpoint the Best Companies to Invest In!

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What You’ll Learn Today

• Key features and benefits of competitive advantage in business

• Real examples of a durable competitive advantage based on scenarios found in Apple and Amazon.

• How Apple and Amazon have leveraged their strengths to overcome adverse events and sustain long-term success.

• How Amazon's continuous advancement in cloud security and logistics systems has helped the company regain investors' confidence.

• How customer-centric devices and continuous innovation have helped Apple to recover quickly from a rapid downfall in its stock price.

The Best Companies to Invest In!!

With an ability to rebound from any bad news situation!

INTRO

Challenges are inevitable in life and often present opportunities for growth and development. As such, pushing through challenges as they are presented is crucial to success. The same is true as applies to challenges within the business landscape.

In fact, from a business perspective, challenges can be the catalyst for a company gaining a competitive advantage. The unpredictable and ever-fluctuating world of investing and business requires a company to have a sustainable or durable competitive advantage. Having a sustainable competitive advantage helps the company to bounce back from temporary setbacks, or challenging and adverse situations.

The purpose of this write-up is to emphasize the importance of sustainable competitive advantage in a business.

In my experience, companies with a proven, durable competitive advantage make for the very best investment opportunities. This is also a sought-after business characteristic that has long been emphasized by legendary investors Warren Buffett and Charlie Munger.

We’ll discuss the key features and benefits of this remarkable business characteristic while using real examples found in Apple and Amazon. 

The Power of Strong Competitive Advantage in Business

A durable competitive advantage is defined as a sustainable strength that a company possesses over its competitors, one that is impossible or very difficult for competitors to replicate.

Two types of businesses possess competitive advantage in the business world: 

• those that produce a unique product

• those that provide a unique service

A durable competitive advantage consists of a set of unique characteristics that enables the organization to maintain superior performance over its competitors in the long run. 

To ensure growth and sustainability, a company must have economic resilience, and there are various factors that drive any such competitive edge of a company to produce truly unique products and services.

Some of the most crucial factors are:

• technological superiority

• robust distribution channels

• cost leadership

• innovation

• brand identity

• product differentiation

These attributes create barriers to entry for the competitors to enter the market, hence enjoying market dominance and sustained profitability. These exceptional attributes enable the company to quickly rebound from the worst events, such as economic downturns, management missteps, or market overreactions.

Apple and Amazon are two exemplary cases of sustainable competitiveness. Both companies leveraged their unique attributes and strengths to gain the economic power to overcome adversity and return to long-term success and growth. Continuous innovation and brand strength helped these giants preserve their market leadership.

To effectively navigate adverse events, a company must have a durable competitive advantage.

Is That Competitive Advantage Durable?

Again, the very best investment opportunities exist with companies that possess a competitive advantage. But careful investment analysis should also include an assessment of whether or not that competitive advantage is durable for the long-term.

A business being considered for investment must be able to keep its competitive advantage well into the future, and ideally it should be able to do so without having to expend large sums on capital investments to maintain it.

According to Warren Buffett, having a low-cost durable competitive advantage is critical for two reasons. The first is the predictability of the company’s earnings power. The second is that it enhances the ability to use its superior earnings to expand shareholder value (i.e., shareholder wealth).

If a company must constantly spend large sums of those superior earnings on capital investments just to maintain its competitive advantage, that’s money being directed away from shareholders.

Low-cost, durable competitive advantages ultimately translate into high cash flows and strong returns for shareholders. Read more about competitive advantage in our prior write-up: Identifying Competitive Advantage.

Apple's Stock Drop

On September 29th, 2000, Apple's stock experienced a dramatic one-day drop of -51.9%. In a classic case of market overreaction, many investors panicked and sold their shares.

But those who recognized Apple's underlying strength and instead bought shares during the dip would have seen remarkable gains over time.

Apple. Inc. has achieved its competitive advantage through innovative product design, strong brand loyalty, and an integrated ecosystem of devices, software, and services. Despite the reduction in the stock trading price, Apple's ability to bring out breakthrough products in the technology market, such as the iPhone, iPad, and iPod, indicates its true resilience and long-term vision.

As a result, knowledgeable investors who were aware of the company's true spirit and strengths started investing more in the company and bought more shares at the time of the dip. These investors enjoyed remarkable financial gains once the company returned to its strong position and the stock price rose!

After a dramatic one-day stock drop in Apple, the company regained its investor's trust and confidence via its robust &innovative business model and its consumer-centric devices. By the beginning of year 2014, Apple shares had gone on to generate a monstrous 4,345% return since that downturn in Sept 2000.

And according to U.S. News and World Report, investors in Apple stock have seen a total return of 48,477% over the past 20 years. This translates to a phenomenal 36.2% compounded annual growth rate (CAGR). This compares to a 411% return at an 8.5% CAGR by the S&P 500 during the same period.

Apple has always focused on premium products that offer high-quality and user-friendly designs, hence increasing brand loyalty among its users. Apple's integrated ecosystem is one of the most crucial components of its robust business model. Their hardware, software, and services work seamlessly together, creating a high-level user experience.

Those who invest in Apple products become loyal customers and keep buying its new products to have a seamless experience. They are the trendsetters in the industry and are fully dedicated to bringing game-changing products to the market. Thus, Apple has always been successful in capturing a large market share.

Amazon Stock Drop

Another excellent example of persistent competitive advantage can be seen with Amazon. Amazon was founded in 1994 by Jeff Bezos. Initially, the company was comprised of an online bookstore, but it rapidly expanded into e-commerce and other areas such as cloud computing, which is one of the breakthrough technologies.

Amazon has achieved a competitive advantage through outstanding customer service, vast distribution channels, and technological advancements.  

In 2018, Amazon faced a major setback when it had a big data breach, raising questions regarding the security of its cloud services. The share price of the company experienced a temporary decline because investors panicked about the impact on the company's financial health.

Despite experiencing major turmoil, the company's competitive strengths, such as extensive distribution channels and exemplary customer service, have enabled it to get through the challenging situation effectively while maintaining its growth trajectory. This means that companies possessing long-lasting and sustainable competitive strengths could achieve long-term success in such an unpredictable and fluctuating business environment.

To regain investors' confidence and trust, Amazon has invested in artificial intelligence and advanced security technologies to secure data. Their robust methods and quick incident response teams have helped the company to get through challenging situations.

Since then, Amazon’s stock experienced upside of 255% for shareholders, reflecting a solid CAGR of 16.9%. Amazon's success derives from continuous innovation in its security services, enhancing its infrastructure. The company has data centers worldwide which offer excellent customer service and robust security-related solutions.

Additionally, AWS's cloud infrastructure has helped the company to be resilient enough to recover from technological disruptions. Amazon has amazing user assistance services as the company provides webinars and safety guidance to all types of users.

Conclusion

Thus, Apple and Amazon present true examples of how durable competitive advantage ensures an organization's resilience and long-term success.

Companies with long-term vision and competitive strengths can overcome sudden downturns in the stock market with their strong competitive positioning. Confidently look to such downturns as opportunity to buy into (or buy more shares of) readily identified companies with strong and durable competitive advantages.

Investors who have built solid trust and confidence in such companies know the true essence of their robust business models. That's why such investors can gain remarkable rewards in the long term.

As a relatively easy approach to identify the best companies to invest in, always seek out companies with an established, sustainable durable competitive advantage. Further, make sure any such companies are deploying their capital effectively with returns on equity (ROE) greater than 10% and returns on invested capital greater than 15%. Learn more about these key metrics used in investing analysis in our prior write-up: Evaluating Stocks Using Profitability Ratios.

Conclusively, the above examples highlight how companies with robust competitive advantages experience long-term success regardless of the unpredictability of the business environment. And they truly make for the very best companies to invest in.

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Information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions.  I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP.

The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website.