I discovered the secret to Warren Buffett’s publicly traded stock picking success hiding in plain sight. Monopolistic market share. You probably say, “Well, duh!” but since I’m a bit of a late bloomer it took me a while to piece that part of it together. It all started with a postmortem of Buffett’s Precision Castparts buy.
I’d spent countless hours looking at all the fundamental metrics of Precision Castparts. Running those metrics through screens produced dozens of companies with similar characteristics, so why did Buffett choose Precision Castparts over the others?
The reason why came together after watching a Stanford Business School lecture by Peter Thiel called “Competition is for Losers.”
Peter points out there are only two kinds of businesses; highly competitive, and monopolies. The highly competitive businesses pretend to be monopolies, and the monopolies pretend to be highly competitive.
In the case of Google, a search monopoly, they pretend to be at the union of a larger market. With 90% of the internet search market worldwide, they will tell you a story about being part of a much larger market. They’ll point to their self-driving cars and say they compete with auto manufacturers. They’ll point to the phones and say they compete with Apple, or they compete with Dell on notebooks. Or they may say they’re in the advertising industry, competing with all forms of advertising. They’re small fish in a large pond; in other words, not the monopoly the government is looking for.
A highly competitive company in a highly competitive market like the restaurant industry will pretend to be monopolistic. Restaurants are a trillion-dollar industry, yet a company will tell a story like, “we’re the only sole British food restaurant in Palo Alto, California.” Businesses in highly competitive markets will pretend to be monopolies by carving out the intersection of large markets.
How does all this apply to my Buffett moment? Just look at some of his holdings. Nearly all have high market share. Coca Cola and Verisign have 44% market share. Moody’s has a 40% market share. Turns out Precision Castparts had a nearly 50% market share at the time of Buffett’s purchase. Monopolistic market share appears to be the difference between Precision Castparts and all the other companies with similar fundamental metrics. This, I figured was the missing link.