Investor Education: FDIC
The FDIC (Federal Deposit Insurance Corporation) is a U.S. government agency that provides insurance for bank deposits to protect consumers against loss due to bank failures.
Read our overview about the FDIC here!
What’s the competition?
Friday marked the close of trading for April. The Dow led the way among the major market indices, closing up 2.5% on the month. The S&P 500 was up about 1.5%, and the Nasdaq also posted a slightly positive return. After being the biggest decliner in 2022, the Nasdaq is leading the way in 2023 with a gain of approximately 21.3% year-to-date.
Back in November 2021—when much of the world had forgotten that stock markets could fall and interest rates could rise—we questioned whether some investors might have been underestimating the role of competition in the electric vehicle industry. Tesla, which had a market capitalization north of a trillion dollars, and Rivian, with a market capitalization north of one hundred billion dollars at the time, both seemed to assume an easier future than capitalism usually allows in a competitive industry.
In a new podcast interview on The Meb Faber Show, Sam Zell reminded us again of the importance of thinking about competitive forces when it comes to investing capital. As Zell describes it:
The single most underrated and misunderstood concept is competition. We all grow up and…we take economics in grade school, and the teacher tells us how terrific competition is and how terrific competition is for price discovery, et cetera, et cetera. But the reality is there’s nothing more frightening than competition. Given my choice, I would always have a monopoly rather than a competitive environment.
And so when I look at potential investments, whether it be in real estate or in other things, the first question I ask is: What’s the competition? Who’s the competition? How is the competition financed? How does that financing compare to my financing? If things get tough, is the competition going to lower their prices to the point where they’re going to destroy my value?
So I think more than anything else, I begin and end by looking for barriers to entry. What is it that can protect me from uncontrolled competition? Whether it be a patent, whether it be a unique location, whether it be a unique structure.
I don’t know what it is, but when I look at businesses, whether it be real estate or otherwise, in terms of making investments, I’d start with and end with: What is the competition going to do to me? And what could it do to me? And if I were outside of this little prism, how would I attack it? Or could I attack it? And would it make sense to do so? But there’s nothing more deleterious than competition, and there’s nothing more you can misunderstand than how your competitor might respond to you.
Many companies claim to have barriers to entry and economic moats to fend off competitors. But true moats are rare. There are smart competitors who are worthy foes. And there are dumb competitors that underprice and can make things difficult until they go out of business.
To a significant extent, this is why an investor like Warren Buffett says that he looks to identify and invest in moats rather than build them from scratch, even though Berkshire Hathaway did build a wide-moat reinsurance business from scratch (largely thanks to Ajit Jain, its vice chairman of insurance operations).
Building moats is hard. But occasionally, the stock market prices those businesses that can successfully fend off competitors at attractive prices. The key is building a list of those companies so that you can act quickly should they go on sale.
“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, you will find only a few companies that meet these standards - so when you see one that qualifies, you should buy a meaningful amount of stock. You must also resist the temptation to stray from your guidelines: If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value.” —Warren Buffett (1996 Letter to Shareholders)
“The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage. Look for more value in terms of discounted future cash-flow than you are paying for. Move only when you have an advantage.” —Charlie Munger
Tweets of the Week
In Case You Missed it…
Berkshire Hathaway Masterclass 2023 [w/ Chris Bloomstran]
3 Engines of Value - by John Huber
Mohnish Pabrai’s Interview at the mint-Equitymaster Investor Hour on April 11, 2023
Greenlight Capital’s Q1 2023 Letter
Stanley Druckenmiller at Norges Bank’s Annual Investment Conference
The Business Brew Podcast: Kristof Gliech - Choosing Managers
Founders Podcast: #300 James Dyson: Against the Odds!
Permanent Podcast: Morgan Housel: The Psychology of Luck - Outside Insights
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