A Reader’s Question: Where Do I Start? My Reply: Competitive Advantages


A Reader’s Question: Where Do I Start?

I’m writing to get some input from you about where to start regarding a fortunate situation I’ve found myself in.  Long story short, I have two very intelligent friends, one working as a newly minted credit analyst at a large regional bank and the other as an XXXX.

After reading “the Big Short” my credit analyst friend wanted to know more about investing – value investing specifically.  Given that his job is analyzing balance sheets, I figured there would be some relevant over lap. We have gotten together for the last three weeks to discuss the practice of investing, primarily in the Buffett/Munger framework with an emphasis on Moats more so than the Graham/Dodd cigar butts.

My lawyer friend and I always have interesting conversations about a wide range of world events. He is very sharp, asks excellent questions, and has become more and more interested in the art and science of investing. He asked me today if he could join our weekly investing discussions. Of course I said yes.

My dilemma is that i would like to bring some structure to this, but not suck out the fun. I am having trouble as to where to start with them.  I have been accumulating value investing knowledge for nearly a decade now and i don’t want to overwhelm them right out of the gate and potentially end the group before it gets started.

What are some good intro pieces or books or cases studies that you would start with. I’ve got two very sharp and inquisitive minds that genuinely want to learn more about Value Investing, and I’d really love to seize this opportunity as I think it would benefit all of us.

So far, I’ve shared your blog, Punchcard Investing’s blog, the MCO write up there and Hagstrom’s “Making of an American Capitalist”, and few other articles I  think are relevant.

Where would you start?

My reply:

It is fine to discuss theory but investing requires actually investing.  Your focus on moats is a good start.  You need to combine your study of moats into finding, valuing and perhaps investing in attractive franchises.

I divide the world into asset Investments with special situations as a subset, franchise investing or buying growth at a low price, and investing with asset allocators without paying a premium for their skills.

Why not start a club to become experts in competitive advantages.   So you could focus on regional economies of scale and search for companies that might fit like trash haulers.   Or you could focus on specialty product economies of scale with customer captivity like Balchem (BCPC), etc. The fun is in applying what you have learned.   Part of where you go is based on the specific interests of your group.  How could a bank develop a competitive advantage? Then go find those banks with a competitive advantage, then what price to pay?  Or take a case study of a competitive advantage of low cost structure like Geico or Compass Minerals and try to find other companies to put into your franchise list.

Between the three of you you could after a few weeks put together a list of 40 to 80 companies with moat divided into type of competitive advantage.  Are there any attractively priced or at what price should you pounce?

You must understand barriers to entry.  No matter what, study will be time well-spent.

Why not start with a simple book on strategy:Little Book That Builds Wealth_Dorsey then progress to Strategic_Logic. You could then search for specific company case studies like COORS HBS Case Study on Losing EOS.

Go to Value-Line and/or Morningstar and put together a list of companies that have competitive advantages.

Be sure you can distinguish between a company that is efficient vs. one with a sustainable/structural advantage.  Either go from broad down to specific or the reverse.

Let me know how your group develops.   Good luck.

3 responses to “A Reader’s Question: Where Do I Start? My Reply: Competitive Advantages

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