“The way I see it, there are really only four sources of economic moats that are hard to duplicate, and thus, long-lasting.
1. One source would be economies of scale and scope. Wal-Mart is an example of this, as is Cintas in the uniform rental business or Procter & Gamble or Home Depot and Lowes.
2. Another source is the network affect, ala eBay or Mastercard or Visa or American Express.
3. A third would be intellectual property rights, such as patents, trademarks, regulatory approvals, or customer goodwill. Disney, Nike, or Genentech would be good examples here.
4. A fourth and final type of moat would be high customer switching costs. Paychex and Microsoft are great examples of companies that benefit from high customer switching costs.”
“These are the only four types of competitive advantages that are durable, because they are very difficult for competitors to duplicate. And just like a company needs to develop a moat or suffer from mediocrity, an investor needs some sort of edge over the competition or hell suffer from mediocrity.”
What are not sources of competitive advantages:
“Well, one thing that is not a source is reading a lot of books and magazines and newspapers. Anyone can read a book. Reading is incredibly important, but it wont give you a big advantage over others. It will just allow you to keep up. Everyone reads a lot in this business. Some read more than others, but I dont necessarily think theres a correlation between investment performance and number of books read. Once you reach a certain point in your knowledge base, there are diminishing returns to reading more. And in fact, reading too much news can actually be detrimental to performance because you start to believe all the crap the journalists pump out to sell more papers.”
“Another thing that wont make you a great investor is an MBA from a top school or a CFA or PhD or CPA or MS or any of the other dozens of possible degrees and designations you can obtain.”
“Experience is another over-rated thing. I mean, its incredibly important, but its not a source of competitive advantage.”
“So what are the sources of competitive advantage for an investor? Just as with a company or an industry, the moats for investors are structural. They have to do with psychology, and psychology is hard wired into your brain.”
Seven traits great investors share
1. Trait #1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric.
2. The second character trait of a great investor is that he is obsessive about playing the game and wanting to win.
3. A third trait is the willingness to learn from past mistakes.
4. A fourth trait is an inherent sense of risk based on common sense.
5. Trait #5: Great investors have confidence in their own convictions and stick with them, even when facing criticism.
6. Sixth, its important to have both sides of your brain working, not just the left side (the side thats good at math and organization.) In business school, I met a lot of people who were incredibly smart. But those who were majoring in finance couldnt write worth a damn and had a hard time coming up with inventive ways to look at a problem.
7. And most important, I believe you need to be a good writer. If you cant write clearly, it is my opinion that you dont
think very clearly. And if you dont think clearly, youre in trouble.