Economic Fortresses

We like to think about our investments in certain businesses as economic fortresses; with the company’s competitive advantage being protected by strong economic fortifications and a moat making it difficult to undermine. When a business has high margins, competition dictates that other companies will look to follow. Over time, without significant advantages businesses can experience declining returns as ‘corporate invaders’ seek to gain their slice of the market. Remarkable businesses have an innate ability to either promote their brand or protect their services in ways that make it difficult for others to copy. They may be the lowest cost producer of a product, such as Novo Nordisk in insulin, or a business with a unique ecosystem, such as Apple, but they possess unique characteristics that make the business attractive as a long term market leader. It is the ability of such businesses to compound their earnings on high rates of capital employed that makes an investment most attractive. We favour businesses with a very high return on capital employed and a long run rate on growth ahead. This differs from the belief that whatever has happened for a number of years is bound to carry on happening indefinitely. The most important things are the steps the management takes today to preserve future growth or the company’s market leading position. Some businesses have economics that are so good they can even survive periods of poor management. History teaches us that with any great company there will be periods like this.

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We like to think about our investments in certain businesses as economic fortresses; with the company’s competitive advantage being protected by strong economic fortifications and a moat making it difficult to undermine. When a business has high margins, competition dictates that other companies will look to follow. Over time, without significant advantages businesses can experience declining returns as ‘corporate invaders’ seek to gain their slice of the market. Remarkable businesses have an innate ability to either promote their brand or protect their services in ways that make it difficult for others to copy. They may be the lowest cost producer of a product, such as Novo Nordisk in insulin, or a business with a unique ecosystem, such as Apple, but they possess unique characteristics that make the business attractive as a long term market leader. It is the ability of such businesses to compound their earnings on high rates of capital employed that makes an investment most attractive. We favour businesses with a very high return on capital employed and a long run rate on growth ahead. This differs from the belief that whatever has happened for a number of years is bound to carry on happening indefinitely. The most important things are the steps the management takes today to preserve future growth or the company’s market leading position. Some businesses have economics that are so good they can even survive periods of poor management. History teaches us that with any great company there will be periods like this.

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