Stock investments: Investment Moats

Dear Gerald,

I remember seeing one of your blogs around end of December which listed your stock holding as at end 2014. I was just going through your blog again but I couldn’t find that anymore. Could you please let me know if that was deleted or it’s still there just that I missed it.

Cheers!

Cindy

I received the above email from one of my readers recently. In view of the historic highs recorded by the US stock market, I have sold off all my stocks since last year and re-position my fund to upgrade to a new and bigger house. I feel that given the current stock market climate, the risk premium is not worth my investment dollars as it is so hard to identify good companies worth investing for the long term and trading at reasonable price. However, I still believe the stock market present many opportunities to build wealth, and therefore, I take this “lull period” to polish my knowledge on how to become a better stock investor.

When I started out investing in stocks, I do not treat the stocks as if I owned the businesses. On hindsight, that was probably why I had a few hits and misses here and there. If you treat your stock investments as if you are the co-owner, chances are, you would pay more attention to the niche business model, management execution, research and development, market share, branding, competitive edge, cost effectiveness, switching costs, network effect and efficient network. This is because these are main ingredients that form the investment moats of a great company.

Investment moats are the fortress of a company that can help it to fend off competition from rivals. Companies with investment moats tend to have sustainable growth and is deemed to be able to generate good returns over the long run. There are many example of companies with unique investment moats. Sometimes, because of regulatory requirements, companies enjoy monopoly or duopoly market share, for example, Genting and SMRT. Branding also play a part in shaping the investment moat of a company. For example, coffee is a fungible beverage (it can be easily substituted) but Starbucks is able to fend off so many rivals and command a premium for its coffee mainly because of its branding.

For technology companies, research and development is key to building investment moats. For example, Apple and OSIM are two companies very aggressive in research and development. Just like any leading international technology companies (Apple), OSIM is able to cannabalize its own products and constantly create consumer demands through new product launches, like uDivine App, uAngel, uPizie, uCozy, uRelax, uPebble, uHug and uBio . The wide variety of products offered made it tough for its competitor to catch up with OSIM. Yes indeed, critics would point out the recent correction in the stock price but I see it as a healthy sign, given that the company is building its moats to become a lifestyle company. This year, the company would be having an ambitious expansion plans for its TWG Tea and flagship massage chair outlets openings.

Another source of moat is the network effect commonly found in e-commerce and social network business. This phenomenon occurs when more customer use that good or service, resulting in increased value of the products or services offered by the company. Typical examples would be SG Car Mart and Property Guru in Singapore.

Magically yours,

SG Wealth Builder