Successful long-term investing is not simply about finding stocks that are growing rapidly. The bigger challenge is identifying businesses whose competitive advantages can strengthen over many years and whose organisational culture supports that advantage.
Paul Black, veteran portfolio manager, believes investors should focus on companies with strong growth prospects, widening competitive moats and cultures that reinforce their strengths. 1.
Look for a competitive moat that is getting strongerBlack's first principle is to focus not merely on whether a company has a competitive advantage, but on the direction in which that advantage is moving. A business may have a strong moat today, but that does not necessarily mean it will remain protected five or 10 years from now.
Investors should therefore assess whether the company's competitive position is strengthening or weakening. Businesses that continually widen their moat can become increasingly difficult for competitors to challenge.
This can allow them to sustain growth and generate superior returns over long periods. 2.
Give corporate culture a high premiumThe second rule is to examine the culture of a business and determine whether it is aligned with its competitive advantage. Black believes a company's values, employee behaviour and management philosophy can play a crucial role in determining whether its moat continues to expand.
A strong competitive position becomes more durable when the organisation's culture encourages decisions and behaviours that reinforce it. Investors therefore need to look beyond management presentations and financial statements.
Understanding the culture can involve speaking with former employees, suppliers, vendors and even competitors. Such conversations can help investors build a broader picture of how a company operates.
3. A high ROIC is generally viewed as a sign of an efficient and profitable business.
However, Black places greater emphasis on the direction of ROIC rather than simply its absolute level. A company whose ROIC is steadily improving could indicate that its competitive advantage is strengthening and that management is becoming increasingly efficient at deploying capital.
Conversely, a business with a high ROIC that stops improving may not have the same long-term potential as a company whose returns on capital are consistently rising. Think differently from the marketBlack also believes investors need to develop an information advantage.
