Warren Buffett has more than once remarked that he likes to buy into businesses that have a moat around them. By which he means some form of protection for their activities and the profits that can be made from them. Another way of saying much the same thing is that he likes companies with market power. They’ve got something or other that means they’re not exposed to the full effects of market competition and can thus generate economic, not just accounting, profits.
An illustration of which is this from a stock picking column this morning:
Questor: buy translation firm SDL for its high barriers to entry, rising sales and improving margins
Questor share tip: SDL’s technology and huge team of translators give it strong protection from competition
A good question to ask if you want to gauge how well a company is defended from competition is: how long would it take to build it from scratch?
If the answer is many years, potential rivals are likely to think that returns would be too long delayed to justify the cost and effort.
This week’s stock would take a long time to replicate. SDL, the translation firm, has been in business for 26 years and during that time it has built up a team of about 1,200 in-house translators and 16,000 freelancers.
“That kind of network takes a very long time to build,” said Stuart Widdowson,
That’s what their recommendation is. There’s a moat there, what a good buy it is.
Now, we’re not stock tippers around here so we’re using the story purely as an illustration of Buffett’s point. But if we were stock pickers we’d be thinking a little more deeply. For a moat is only a defence, it’s not a certainty of being successfully defended. People did take castles, after all. It’s also normally advancing technology that leads to moats being breached. And so what of machine translation……