VIDEO: Two important factors every investor should consider
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Investors are making crucial mistakes by not taking these two factors into consideration, says Kurt Winlich, portfolio manager at WCM Investment Management.
The first factor is to look at the ‘economic moat’ of the company or investment.
This refers to an idea first presented by Warren Buffett, that a business is like a castle and its moat is the company’s competitive advantage it wields to protect long-term profit and market share.
“The critical idea is how the competitive advantage is changing — is it getting stronger, or is it getting weaker? It’s the direction of change that matters, not the absolute level.”
“Does the company have some kind of long-term growth path in front of it; is the industry it is within set for secular growth, or secular decline? If the global demand for a company’s products is shrinking, or worse, if the product has been made irrelevant by a change in consumer preferences, this can be quite dangerous.”
The second factor that investors should look for when trying to find a good, long-term investment, is the company’s culture.
Mr Winlich argues that many investors underestimate its importance as it is considered a more “soft” aspect of a business.
“Corporate culture is the biggest influence on a company’s ability to grow its competitive advantage, its moat,” he says.
“When a company culture is poor, this can lead to issues such as slow delivery, poor service or rude employees, all of which can affect the customer experience and the company’s long-term financial performance. In contrast, companies with great service and employees that go the extra mile rarely have complaints made against them.
“And if they’re not making complaints, customers will return to the better businesses, leading of course to better business results. It’s that simple.”