If you look at Berkshire Hathaway‘s latest 13F filing, you’ll see three credit companies listed: American Express Company (NYSE:AXP), Mastercard Inc (NYSE:MA), and Visa Inc (NYSE:V). American Express Company (NYSE:AXP) is by far the largest holding of the three, but the presence of the card trinity in Berkshire’s holdings suggests that like Visa Inc (NYSE:V), Berkshire is everywhere you want to be.
It’s worth considering why anybody would want exposure to multiple companies in the same industry. Why wouldn’t you just pick the best and run with it? The first and most obvious reason is that the industry is poised to grow. According to Mastercard Inc (NYSE:MA) CEO Ajay Banga, roughly 85% of the world’s retail transactions are conducted with cash or check, so there is tremendous market opportunity for these companies. Furthermore, each company is solid in its own right. American Express Company (NYSE:AXP), Mastercard Inc (NYSE:MA), and Visa all benefit from network effects; the more places accept them, the more valuable the service is to the cardholder. Network effects are one of the four sustainable competitive advantages across industries, so each company possesses the structural characteristics of a strong economic moat.
While the companies compete against each other, their services aren’t mutually exclusive. Many consumers carry multiple credit cards, either for optionality or to fuel a spending habit. Therefore it’s not unreasonable to assume multiple credit companies can continue to exist in the same wallet. American Express Company (NYSE:AXP), Mastercard Inc (NYSE:MA), and Visa control more than 90% of the market by purchase volume, so owning all three gives you good exposure to the industry’s growth.
Past performance offers no future guarantees, but Mastercard Inc (NYSE:MA) and Visa have returned well since their IPOs and American Express Company (NYSE:AXP) has been a great investment for Buffett since he first bought shares in 1964. Here’s a look at the return of the top four companies by purchase volume over the past five years versus the S&P 500:
As you can see, the returns trump the S&P, though it would have helped to own Discover Financial Services as well.
If 4 R.R.s are owned … pay $200
There are other areas we could employ this strategy. We’re looking for concentrated industries with good long-term prospects and companies that possess strong competitive advantages whose products or services are not mutually exclusive. Remember Monopoly? A classic strategy was to own all the railroads, because while owning one was great, having all four was even better. It turns out, reality is not so different.