In spite of what you may have heard: successful investing doesn´t need to be complicated. You don´t need to be a genius or have access to a super mega computer processing information at the speed of light in order to achieve solid returns from your investments.
Finding high quality companies with strong competitive advantages and holding for the long term may require some common sense and discipline, but not much more than that. You don´t need to take my word for it, Warren Buffett has said it quite clearly.
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”
The Best Kind of Competitive Advantage
“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.”
Competitive advantages may come from different sources like technological superiority, cost efficiencies or special patents. But one fantastic source of competitive strength which is easy to identify and can be one of the strongest and most durable ones is brand differentiation.
Technologies change, patents expire, and cost advantages can be eroded by the competition. But great brands build an emotional connection between the company and its customers, and they can last for a long time – even forever – while generating superior profitability for investors.
Some Powerful Consumer Brands
The Coca-Cola Company (NYSE:KO) is the quintessential example of a company with an amazing brand power, the most valuable brand in the world according to Interbrand and – not by chance – the biggest position in Warren Buffett´s portfolio. Coca-Cola drinks sell at prices which can be double the price charged by competitors like Cott Corporation (NYSE:COT) and this allows for fantastic profit margins.
Comparing profitability figures for Coke versus Cott is a nice way to measure just how relevant a brand can be to shareholders. Both in terms of profit margins at different levels and return on equity, the differences are abysmal. Brand equity may be intangible, but it does have some big economic and financial implications when investing.
How does Starbucks Corporation (NASDAQ:SBUX) get away with charging exorbitant prices for coffee when there are many competitors offering their products for a fraction of that value? Product quality is clearly a factor, you don´t build a successful brand without product quality, but there is much more to Starbucks than the taste of the coffee.