Some industries lend themselves to the creation of economic moats more so than others.
These are the industries where you will want ot spend most of your time.
The economics of some industries are superior to others.
You should spend more time learning about attractive industries than unattractive ones.
Every industry has its own unique dynamics and set of jargon.
Some industries (such as financial services ) even have financial statements that look very different from others.
Wade through the different economics of each industry and understand how companies in each industry can create economic moats - which strategies work and how you can identify companies pursuing those strategies.
Here are some areas of the market that are definitely worth more of your time exploring.
- Banks and Financial Services
- Business Services
- Health Care
These are not the four areas of the market with worthwhile investments.
They are highlighted because they contain so many wide-moat companies.
There are great firms in even the least likely areas of the stock market.
The goal is to help answer a few essential questions:
- How do companies in this industry make money?
- How can they create economic moats:
- What quirks does this industry have that an investor should know about?
- How can you separate successful from unsuccessful firms in each industry?
- What pitfalls should you watch out for?
Over the long haul, a big part of successful investing is building a mental database of companies and industries on which you can draw as the need arises.
Banks and Financial Services
Most financial services firms are in excellent economic positions as middlemen for money.
Banks in particular, enjoy the enviable position of paying very little to hold on to depositors' money, which they then turn around and lend out at substantially higher interest rates than they are paying to depositors.
Some banks do so well at levying fees and cross-selling financial products that depositors literally pay the bank to hold their money.
Banks have somewhat confusing financial statements, many investors simply pass them by or look at only the biggest and most well know firms.
By learning what makes banks and other financial services firms tick, you will be ahead of most investors.
This ground is less picked-over, and you will likely find some solid investment ideas as well.
This area of the market contains some very attractive firms.
Besides the larger industries which are boring but profitable, businesses services are often packed with niche firms that dominate their corner of the economy.
There are usually only a few public companies in any one niche, so the industry specialists on the stock market tend to pass them by.
Thus, the stocks don't get hyped as much to institutional investors.
The companies in this area are usually self-funding, which means they don't need many investment banking services; thus getting less attention from the professionals.
Less attention from the professionals can mean more opportunity for smart investors, so don't ignore business services.
The long-term demand outlook is very strong.
The companies in this area tend to be highly profitable.
Even smaller firms can build lasting economic moats, e.g. medical devices companies.
Tread carefully with biotechs and some managed care firms.
Most biotechs are single product lottery tickets, and most managed care firms are affected by regulatory issues - minor changes in rules can have a huge impact.
Spend some time to know the media business.
In the past, many media companies build moat themselves through oligopolies or monopolies - there is little demand for more than a couple of daily newspapers in any one city.
Media is one of the few industries in which product vendors are paid before they have to deliver anything, because a large amount of media is sold via subscription. That is how many media firms make money.
With the rise of digital information, this media business is becoming more challenging and its economic moat increasingly penetrated.