This Buffett test helps distinguish Coke from Kodak - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This Buffett test helps distinguish Coke from Kodak 

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In this issue:
» Euro crisis to affect exports, but to also open new markets
» 4 central banks pumped US$ 6 trillion in 4 years!
» Human Rights Watch report slams India's mining industry
» A lesson for Southeast Asian economies
» ...and more!

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'Moat' is a very popular term that legendary investor Warren Buffett uses to define a great business. Literally, 'moat' means a wide and deep pit dug around a castle for defence against attacks by enemies. In investing parlance, this translates into a business that has a strong competitive advantage.

But competitive advantage is not a measurable parameter. So how does one find stocks with a strong moat? There is this one acid test that you can use while evaluating a prospective stock. Ask this one simple question. If you were given billions of rupees, would it be possible for you to replicate the success of this business? Would you be able to put a significant dent to the company's business and profitability? If the answer is in the negative, then you have just found a great business with a very strong moat. Some of Buffett's greatest wealth creators such as Coca-Cola, Gillette, Geico and Wrigley (the list is long) had passed exactly this test. Each of these stocks had some robust in-built moat that gave them a substantial advantage over their competitors.

Moats can be in the form of various things. For instance, in the case of auto insurance firm, Geico, the moat was low cost. In other cases, the moat can come through superior product quality, strong brand image, better quality services, patents, real estate location and so on.

The next important question- Is the moat is durable enough? For one, do not confuse temporary advantages with moats. In some case, the companies may lose their competitive advantages with shifts in the industry. Think of Xerox and Eastman Kodak. What you should be looking for is a company like Coca Cola whose moat can widen over time.

According to you, which Indian stocks have a durable moat? Share with us or post your comments on our Facebook page / Google+ page.

01:08  Chart of the day
Policy makers in India are worried about the impending adverse consequences of the ongoing Eurozone crisis. One of the biggest impacts would be on India's external trade. The European Union accounts for about one-sixth of India's exports. In the event of a full-blown crisis in the Eurozone, India's exports would be severely affected. However, there may also be a silver lining for exporters. The European countries have so far dominated export markets of Africa and Asia. But the current debt crisis has hampered their economic growth significantly. This puts Indian exporters in a favourable position to target these markets. The Indian government has doled out some special incentives in the form of focused market schemes to encourage diversification of exports to these markets. Today's chart of the day shows India's export and import trade with the European Union over the last six years.

Data source: The Economic Times
*April to September 2011

US Federal Reserve, European Central Bank, Bank of England and Bank of Japan. These are entities once considered the backbone of global financial system. After all, they steered the direction of more than two third of the world economy. But what they have done over the last 4 years hardly seems to grease their reputation. They have recklessly run their printing machines to create US$ 6 trillion worth of extra liquidity. In hindsight, this has certainly not been praise worthy task. For one, the balance sheets of the 4 big regulators have more than tripled to US$ 9 trillion since 2008. Secondly, the governments of these economies are more leveraged and unstable than ever before. Thirdly and most importantly, the key objectives of monetary easing are far from being achieved. None of the Western economies have shown signs of economic recovery. The employment scenario in the US and Eurozone is worse than in 2008. Thus the additional US$ 6 trillion of electronic money has not served any purpose other than deferring the inevitable. Couple of more billions may soon be added by the central banks to keep the recovery efforts going. But unless the too big are allowed to fail, the problems in global monetary system will stay unaddressed.

India's mining industry is an increasingly important part of the economy, employing thousands of people and contributing to broader economic growth. But mining can be extraordinarily harmful and destructive if not properly regulated. And because of a dangerous mix of bad policies, weak institutions, corruption and lack of government oversight, regulation of India's mining industry is largely ineffectual. The result is chaos. It has also led to rampant illegal mining. This fact is also highlighted by a recent report published by the Human Rights Watch. The report has slammed the Indian government for its failure to enforce key human rights and environmental safeguards in the country's mining industry. The chaos in India's mining industry has some of its roots in much broader patterns of corruption and poor governance that are not easily solved. Nonetheless, there are pragmatic steps the Indian government could take to repair some of the most glaring regulatory failures.

Asian economies are touted to grow at a faster rate than the US and Europe. Little wonder that these countries want a bigger say in global affairs. One idea being put forward is creating a more integrated regional economy. But given the problems that another integrated model is facing, notably the Eurozone, this may not be as easy as it seems. As of now South East Asian economies' plans include working towards lower trade barriers and streamlined customs procedures. Also on the anvil is closer integration of regional financial markets and freer flows of labor. The aim is to implement these and other steps by 2015. Some goals such as trade reforms have already been partially achieved. However, developing a common currency may not be such a good idea. And the Euro is a classic case in point. The Euro debt crisis, if anything, has proven how difficult it is to stick to a common currency. Especially, when different nations have different scale of problems. Further, when the Asian financial crisis struck in 1997, most Asian economies were able to get out of trouble simply because they allowed their currencies to devalue. This is proving to be a tough task for the Eurozone on account of a single currency. Not just that, there is wide ranging disparity across Asian countries as well. Thus, for the region to adopt a common currency would be too ambitious a goal in the current scenario.

Winning the 2012 UEFA Euro football tournament may just be a bad omen for the Italians. The previous winners were Greece in 2004 and Spain in 2008. The Euro crisis has hit these two nations badly. And if things continue the same way, Italy could be the next country on the brink of disaster. Yields on Italy's 10-year government bonds reached 6.2% on June 13, up from just 4.8% in March. Plus, with government debt at 120% of GDP, Italy is vulnerable to a spike in yields on its sovereign bonds. It is the only European country without official capital support. After the June 9 deal to lend Spain US$ 125 bn in bank bailout funds, this became a lot more apparent. An Italian default is not a foregone conclusion, but if the crisis persists, it may just be on the chopping block.

After witnessing one of the best weeks of the calendar year 2012 last week, stockmarkets worldwide continued their positive run this week as all of the major economies ended higher. Markets in Hong Kong, Brazil and Singapore were amongst the best performing markets this week, recording gains of about 3% to 4%. The US markets ended higher by 1.7% over the previous week. Global markets picked up during the second half of the week as investors grew more optimistic ahead of the crucial Greek elections this Sunday.

The Indian equity markets too ended the week with strong gains, with the BSE-Sensex, India's benchmark index, up by 1.4%. Similar to what was witnessed by the global markets, the Indian markets picked up during the second half of the week on hopes that the RBI, like central banks worldwide, would take steps to contain damages in case Greece exits Eurozone. Amongst the other world markets, China and UK were up by 1% each during the week.

Data Source: Yahoo Finance

04:45  Weekend investing mantra
"I like businesses that I can understand. Let's start with that. That narrows it down by 90%. There are all types of things I don't understand, but fortunately, there is enough I do understand." - Warren Buffett

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    5 Responses to "This Buffett test helps distinguish Coke from Kodak"


    Aug 19, 2013

    confronting change v/s neglecting it



    Aug 19, 2013

    confronting change v/s neglecting it


    Ramachandran S

    Aug 14, 2012

    ITC, TCS, Titan, SBI, ICICI Bank & Elgi Equipments are some in that category.

    Like (2)


    Jun 18, 2012

    Indian listed companies ONLY, in Indian circumstances : Asian Paints, ITC, Hind Unilever, Bata, Castrol, Crisil,Titan, TTK PRESTIGE, Eicher, Gillette, Proctor & Gamble, GlaxoSmith Consumer,Page Inds, MRF, Bosch, Sun Pharma, Strides Arcolab etc !! - pricing power, location, competitive advantage etc etc !!

    Like (2)

    shome suvra

    Jun 16, 2012

    A co should have sustainable growth for which return on equity and retention ratio are important. Retained money should be reinvested.

    Like (2)
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