Profit is usually a measuring benchmark for an investor in the stock market. Profit here is not just about money, it is also about monopoly. A monopoly exists when a company controls the entire market for a specific product or service. We can debate if Microsoft or Google has dominate or monopoly the market in their niche of field. Much has been written and talk about monopoly or near-monopoly, but one thing is clear: All of them make good money.
In the mind of an intelligent investor, the letter M should not only stand for “money” but also “monopoly”. So, in here you should start searching for near-monopoly or companies that Buffett refers to as wide moats around them. Monopolies make above average returns. There is no other better contemporary example than Microsoft. Microsoft has the power to set the prices it charges for its product. Its not hard to find evidence as you can look into their annual financial report. Whenever a company creates a near-monopolies competitive advantage, it offer a good investment opportunity. A good investment opportunity will only succeed if you have the good investment strategy in hand.
However, if you look for a monopoly, be careful to investigate whether the company is likely to maintain profitable or not. Is not a norm or necessary for a dominant or large company to be profitable. For an example, General Motors (GM), is the world’s largest car manufacturer and generate annual revenues of about $200 billion, but it yield no earnings for its shareholder and went bankruptcy in year 2009.
How to look for M
The way to identify a monopoly is to look around which generally are smaller companies in regional markets. just simply because the company or firm appears to be monopoly, it does not necessary mean that it is a good investments you should always stick back to your basic principle in investing. Examining the company’s return on assets, compute intrinsic value and margin of safety. Try to estimate the sustainability of profit for a number of year. Beyond profitability, the price you pay for the share is also important if you are a value investor.
If you have manage to mine a monopoly company with good bargain, do not sell a monopoly in a hurry. Peter Lynch shared his experience by owning Philip Morris and Subaru stocks, saying that if the growth is still good, one should not sell. But if you think that there is a high chances for a competitor to success, then you only you should sell until then.