Wednesday, December 21, 2005

The Importance of a Sustainable Competitive Advantage

Understanding the sustainable competitive advantage period should be the most important focus in understanding any business. This is true both for us as investors as well as for management itself.

Regrettably, or perhaps to our advantage, Wall Street and most investors spend very little time thinking about this concept.

Without a competitive advantage, a corporation has limited economic reason to exist. A company’s competitive advantage is the only reason that it can achieve excess returns for its shareholders. Ultimately, when the competitive advantage period ends for a business, the return on invested capital falls to their cost of capital (or worse!)

An interesting study is cited by Paul Kedrosky here.


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