“Competition is for losers,” said PayPal co-founder and billionaire venture capitalist, Peter Thiel.
The best businesses are monopolies because they have no competition. They own the markets and they decide on the prices.
Buffett echoed the same sentiments, “if you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you’ve got a terrible business.”
Profits are often competed away when there are too many competitors. And any highly profitable businesses would attract competitors. Hence, Buffett said that businesses must have “moats” to prevent competitors from taking way their market share so as to maintain their monopolies.
If you can find these monopolies, they would be able to capture outsized profits in the long run – only monopolies are meant for long term investments.
We have also noticed that modern monopolies often attain their powers by making products or services cheaper to consumers, to the point that they can be free. Google and Facebook are good examples where anyone can use the services for free while Amazon brings the cost down for consumers on a wide variety of products. These are made possible because technology has brought a economies of scale that we have never seen before – the marginal cost of serving one more customer or selling one more product / service is close to zero.
Monopolies are often targeted by governments and risk breaking up due to their anticompetitive nature. Thiel mentioned that monopolies often hide their powers by inventing competitors – for example, Google will say they are a small fish in the big advertising industry but will not acknowledge that they have 92% market share in the search industry.
Being a monopoly does not mean that they have no competitors. They do, but their competitors have minuscule market share compared to that one big winner.
At other times, a market may be dominated by a few companies rather than a single company. Such markets are known as oligopolies and such businesses are powerful as well. Investing in all the companies together would give you a monopolistic exposure. For example, investing in Visa and Mastercard would give you 90% of the credit and debit card market in the US.
Let’s explore some monopolies that happen to be listed, so that we can invest in them as retail investors.
Amazon in US and Alibaba in China
Amazon and Alibaba are familiar names when it comes to e-commerce. Each casts its monopolistic powers in its area of operations. Amazon has 39% market share in the US, far ahead of second-placed Wal-Mart with just 5.3% share.
Meanwhile, Alibaba is the king of e-commerce in China, amassing a 56% market share. JD.com is gaining ground though and it is in second-place with 16.7% share.
As of Aug 2020, Google has 92% market share in global search, across all platforms (desktop, mobile and tablet). Bing is second-placed with 2.8%.
Google has became a verb that’s interchangeable with ‘search’. That’s how great their mindshare is.
But Google doesn’t make money from search directly. It is free to use as with many of the other Google softwares. The company charges advertisers by selling their users’ attention to them.
A research has found that users demanded $17,500 a year in order to give up the use of search engines.
Facebook is the largest social media in the world with 2.7 billion monthly active users as of the end of 2Q2020. That’s about 482x the population of Singapore!
Moreover, Facebook has acquired many other social media platforms over the years. As you can see, Facebook-owned social media platforms take up four out of the top 6 spots in the chart below:
The super app, WeChat, comes to mind. It is the top messaging app for the Chinese and increasingly the functions have expanded to payments, social media, e-commerce and more.
With so many functions on WeChat, it is no surprised that it has the most monthly active users in China. Even the second placed QQ belongs to Tencent too. We can safely say that Tencent is king of messaging in China.
But not only that, Tencent also has more than 50% market share for mobile games in China!
It doesn’t end here. Tencent is the largest venture capitalist in the world with a very impressive portfolio of fast-growing tech companies. We covered it here.
Visa and MasterCard
I bet you have either a Visa or MasterCard in your wallet. Hack, I think there’s a high chance you have both. They have become a necessity in our lives especially as we are heading towards a cashless society.
These two companies own a combined 90% of the credit and debit card market in the US.
But they are not widely accepted in China. The Chinese have their own UnionPay (unfortunately it is stated-owned and you cannot invest in it). Given the huge domestic market in China, we shouldn’t be surprised that Visa and MasterCard pale in comparison. Excluding China, Visa and MasterCard still command a large portion of the market share globally.
MarketAxess is the least well-known company in this list probably because it runs as a B2B business.
The company provides a platform for the trading of corporate bonds which solves the inconvenience of over-the-counter (OTC) transactions and provide higher liquidity.
It has a whopping 85% market share, beating rivals such as Tradeweb and Bloomberg.
Boeing and Airbus
Both of these companies have been hit badly by Covid-19. Airlines are suffering and downsizing, so we would expect orders for new planes to be cancelled. Recovery is not in sight.
That said, it is undeniable that commercial aircraft manufacturing is an oligopoly. Boeing and Airbus have a combined market share of 91%!
Bombardier, Embraer and AVIC are small players.
Monopolies do not last forever
Monopolies are not eternal as times will change. There will be new monopolies who disrupt the incumbents. One example is Kodak – it commanded 90% of film sales and 85% of camera sales in the U.S. in 1976. Today, it has declared for bankruptcy after the successful commercialisation of digital cameras, and subsequently phone cameras.
Another example is Nokia. My first handphone was a 3210 and I was playing Snake on it. At its peak, Nokia had 40% market share in the mobile phone market which Apple won over with the popularity of iPhones.
Hence, you have to monitor your monopoly stocks even when you are investing for the long term. You may have noticed that the changes tend to happen faster for technology related stocks, which was why Buffett avoided them most of the time.
Regardless, it is important to look out for permanent fundamental shifts in the business landscape that will affect the monopolies that you have invested in.
MOAT ETF – an easier way to invest in monopolies
Don’t want to pick stocks but want to invest in monopolies?
I have good news for you – there’s an ETF that invest in monopolies – VanEck Vectors Morningstar Wide Moat ETF (CBOE:MOAT).
Morningstar is known for their fund ratings but it also provides investment research. One of which is the Morningstar Moat – inspired by Warren Buffett because he often used the word ‘moat’.
The analysis involves five main areas to determine a company’s competitive advantage – network effect, intangible assets, cost advantage, switching cost and efficient scale. The company created an index to track the basket of stocks which have moats and it has beat the S&P 500 slightly over the last 8 years – MOAT ETF returned 14.57% per year while S&P 500 did 14.21%.
The ETF simply follow 49 companies currently. You may disagree with some of the holdings but you have to own the whole portfolio if you want the convenience of the ETF. Alternatively, you could put in the effort to DIY and manage your portfolio on your own.
Would you invest in monopolies?
I have shared that one of the most important economics in business is to avoid competition. Competition destroys profits because you have to sell lower when everyone else does and your cost goes up when competitors bid for the same resources.
Hence, a smart way to invest is to pick companies that are monopolies or near-monopolies (oligopolies). I have shared 10 stocks that I believe have monopolistic powers today, you may agree or disagree with me. This is a subjective matter. Of course, one should also see if the share price is reasonable to pay for as well as the future growth potential.
There’s an ETF to invest into if you aren’t the type to buy your own stocks.
Are you convinced? Would you put your money in monopolies?