Wide Moat Investing

 

You will find tons of different strategies for investing in stocks.  One of my favorites is investing in the stocks of companies that are considered to have a wide Moat.  A Moat is a structural barrier protecting companies from competition.  Just as moats were dug around medieval castles to keep enemies at bay, economic moats protect the high returns on capital enjoyed by the world's best companies.   A great business is one that can fend off competition and high returns on capital for many years into the future - increasing earnings, returning cash to shareholders, and compounding intrinsic value.

 

 

    

Warren Buffet is a huge proponent of Moats.  In a famous 1999 Fortune article, Buffet wrote, "The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage.  The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. 

 

Wide Moat investing is not a new topic, however Morningstar recently published a book detailing how to find companies that have a wide moat.  The five major sources of competitive advantage they claim companies with wide moats have are:

1. Intangible Assets - includes brands, patents, or government licenses that explicitly keep competitors at bay.  (If you have ever watched the show the Shark tank one of the first things the sharks ask the entrepreneurs is if they have a patent on their product.)
2. Cost Advantage - Firms that have the ability to provide goods or services at lower cost have an advantage because they can undercut their rivals on price.  Alternatively, they may sell their products or services at the same prices as rivals, but achieve fatter profit margins. 
3. Switching costs - those one-time inconveniences or expenses a customer incurs to change from one product to another.  Customers facing high switching costs often won't change providers unless they are offered a large improvement in either price or performance, and even then, the risk associated with making a change may still prevent switching in some industries
4. Network effect - occurs when the value of a particular good or service increases for both new and existing users as more people use that good or service, often creating a vicious circle that allows strong companies to become even stronger
5. Efficient scale - a dynamic in which a market of limited size is effectively serviced by one or just a few companies.  The companies involved generate economic profits, but potential competitors are discouraged from entering because doing so would result in insufficient returns for all players

The more of the above factors a company has, the wider it's moat.  Having a wide moat does not guarantee stock success, but it gives the company an edge over it's competition

 

Here is a recent article about how Apple will widen it's moat once it releases their new smart watch.

2014 LAST CHANCE FINANCIAL PLANNING

 

Next week I am sending out the 2014 Last-Chance Financial Planning Checklist. It's a quick way to determine if you need to take any actions before the end of the year.

 

It's a simple checklist that covers only those areas that need attention at year end - taxes, retirement savings, investments, insurance, and medical. It might take you five minutes, tops.

 

 

View the Checklist

 

Once you see the checklist, if you have any questions, please feel free to contact me. If you know someone who could use this checklist, let me know. I will make it available to anyone who could use the help.  Look for yours soon. If you don't see it, let me know. I'll be sure you get it.

INSURANCE PREMIUMS - THE HIDDEN COSTS OF PARTIAL INSURANCE PAYMENTS

 

When you purchase an insurance policy whether if it is for your home, auto, life, or business you are usually given the option of paying the entire year's premium up front, or you can pay the premiums periodically over the year (semi-annually, quarterly, or monthly).  The annual payment will be the cheapest, with the other options being a little more expensive.  Usually the difference for getting to pay monthly, quarterly or semi-annually doesn't seem that much, but the real cost of using that option can be much more expensive than it seems.  It is the equivalent of an interest rate charge and it is important to calculate the APR on that loan. 

 

Let's look at an example of a policy that charges $270 a quarter, or $1080 a year.  The same policy has an annual premium of $1000.  The decision to pay premiums quarterly means a whopping 21.5% annual percentage rate.  That's credit card like interest rates.

 

You might think the difference is a mere 8% ($1000 vs $1080) annually but that's deceptive.  Unlike a loan, a policyholder who opts to get an advance on the $1000 annual premium by paying quarterly installments lacks the use of that full borrowed $1,000.  APR's vary widely in the insurance industry so you may check to check the following online calculator before you commit to a periodic schedule.  An online calculator to find the APR of fractional premium payments is available at www.thinkinsuranceforum.com/pages/aprcalc.html

 

 

WATERCOOLER

 

Jeter - must work 2 innings for all of his gifts

 

Derek Jeter's career had a storybook ending Thursday night with the game winning hit against the Orioles.  During his farewell tour this year Jeter received gifts from just about every team he played.  The gifts included things like watches, golf clubs, cowboy boots, and a $6,000 kayak.  To pay Uncle Sam's fees (about $16,000) on the gifts he owes Derek would have to play two innings of baseball at this year's salary of $12 million.  162 games x 9 innings = 1458.  12,000,000 / 1458 = $8,230 (what Derek earns per inning)

 

 

How an IPO Works

 

Alibaba went public this month with the largest public offering in the U.S. It's often confusing what is involved when a company offers shares to the public.  Here is a nice infographic from the NYSE that explains the process.  One of my favorite books on the topic is "An Introduction to Global Financial Markets" by Stephen Valdez.  It's a good primer on a lot of financial topics including how the stock, bond, and currency markets work, how monetary policy impacts things, what are derivatives, investment banking

 

 

The real recovery

 

Much has been talked about the recovery that has been happening since the economy has bottomed out in 2009.  But one thing has not recovered - worker's income.  The chart however does show that it still pays to get a college degree.