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1-Page Summary of The Little Book That Builds Wealth
The Best Investment Strategy
Investors can choose from a variety of stock market strategies, but many are flawed. The best strategy is to buy great companies at good prices and hold them for the long term. This approach works well for investment guru Warren Buffett. To make it work for you, follow a four-step process: 1) Identify firms that have sustainable competitive advantages and are likely to be profitable year after year; 2) Wait until their stock prices fall below their intrinsic value before buying them; 3) Hold these stocks as long as they continue to meet your criteria; 4) Consider selling if they no longer fit your definition of a great company.
- “Hold” – Do not sell your stocks unless: 1) the company “deteriorates”; 2) the stock price goes above what it’s worth; or 3) you find better investments. Otherwise, hold them for a long time. 4. “Repeat” – Follow these same steps with all of your investments.
Look for High and Sustainable Profits
When you’re investing money, focus on businesses that have the highest return on capital. They are the most profitable ones and offer great returns for investors. Competitors will try to emulate those companies, but only some can keep up with them in terms of profits. Some competitors will fail because they can’t maintain their high rates of return on capital for a long time. However, there are some businesses that do well no matter what competition does to them because they’ve been able to figure out how to stay competitive despite challenges from other firms.
“Economic Moats”
Competitors can’t take over a profitable company’s business because they lack the advantages that make it successful. These are called moats, and they protect companies from outside competition. If you want to invest in a good company with strong competitive advantages, then look for these factors so you can find great opportunities.
Economic moats are invaluable assets for companies. For investors, they protect their money by making the company more resilient to competition and market downturns. They can weather those storms much better than other companies without them. Coca-Cola is a good example of that because it has a primary competitive moat in its core brand, which made up for the failure of New Coke. Your job as an investor is to learn how to spot good undervalued companies with strong economic moats and invest in them quickly before others do.
“Moot Moats”
There are many factors that lead to success, but not all of them actually have a competitive advantage. For example, having competent management is an important part of being successful; however, it’s not enough to act as a barrier for competitors. Competitors can always come up with their own managers who are just as good or better than the current ones. Also, things like great strategy and large market share aren’t necessarily barriers because they’re only short-term advantages until something better comes along.
Chrysler was printing money during the 1980s when it introduced the minivan. However, its competitors quickly jumped into the minivan business. Chrysler did not have a structural competitive advantage. Without a moat, it could not protect its minivan franchise. On the other hand, consider Chrysler supplier Gentex which manufactures rearview mirrors that dim automatically and can be adjusted to match different lighting conditions in any given environment; this is an example of a company with an economic moat because no one else has access to these patents or can compete with them without infringing on their patent rights.
