5 Business Advantages That Will Make Investors Money Forever

I look for these five metrics in every business I invest in. It's how I've generated 18% a year over the last 5 years.

When you’re deciding to invest in a company or not you need to have a framework of what makes a great business.

I look for five specific competitive advantages, also known as economic moats, to determine it makes my buy list or not.

1. Exclusive access to resources

If a firm controls a critical input, they shape the economics of the entire market. Competitors can exist, but they’re forced to operate with higher costs, worse quality, or limited scale.

Unlike brand or marketing moats, this one is structural. No amount of clever positioning can replace a resource you simply don’t have.

Resources may include mining rights, distribution rights, or supplier agreements. In this day and age data is king and those who own it have a major advantage.

Kevin O’Leary, the ostentatious investor on Shark Tank, invested in a cat DNA company called BasePaws. A few years later the company was bought by Zoetis for over $50 million. The below video explains what nobody saw coming, including O’Leary himself.

Some positive tail winds a business experiences with resource control include robust pricing power, competitors offering weaker products, and long term contracts with suppliers.

2. Switching costs

A switching cost is the price paid to change products or suppliers. Switching costs can be monetary, psychological, effort based, or time based.

I’ll use SalesForce as an example. The more data a businesses has about their customer on the Customer Relationship Management tool the better they can serve their client. Now if one day the company decides to use another CRM tool, moving that data is extremely difficult.

Since switching is such a hassle SalesForce has strong pricing power. One former employee told me their base service is $18,000 per year per user with a mandatory spend of $100,000 in services in total.

There is a dark side, because these fees, whether monetary or not, are not for the benefit of the customer. Some mutual fund companies have fees called Deferred Sales Charges or Back End Loads. These are penalties expressed as a percentage for selling their funds early. They can be as high as 7%

3. Network effect

The network effect makes a company more valuable as they gain customers. It’s a powerful force when customers of a business interact with each other.

Each new customer acquired exponentially increases the value of the service or product. Since we’re social creatures we crave connection whether that’s in the real world or digitally.

Imagine if only two people on the planet used Substack. How useful would this platform be? The marketing strategy for these companies is actually not the masses initially.

They find a small group of early adopters, tweak the service, and spread through word of mouth or advertising.

It’s a powerful moat because once the business hits critical mass everyone who isn’t a part of it feels left out. FOMO in action.

One problem companies can run into when basing their model on the network effect is congestion. If the infrastructure isn’t available to support, whether that be storage, bandwidth, or customer support, the company will suffer.

4. Regulatory barriers

Regulatory barriers are government imposed restrictions or bureaucratic red tape that hinder business operations, market entry, or innovation.

They’re designed to protect industries the government deems vital to society operating correctly. Utilities are a great example. Imagine if you couldn’t turn your lights on or heat your home. That’s why these companies require strict licenses to conduct business.

Firms protected by government policy come with predictable revenue streams which make investors happy.

We’re seeing regulatory barriers play out on a macro scale right now with tariffs. Tariffs are designed to shelter domestic businesses from foreign competition.

An example Trump has been bothered by is construction material being imported from Canada instead of being purchased from American suppliers. This is why we’re seeing 50% tariffs on Canadian aluminum.

The downside is barriers reduce competition and slow down the adoption of new technology, which if held long enough, will decrease GDP. There isn’t a burning incentive to find new revenue streams if the one you currently have is supported by Uncle Sam.

5. Efficient logistics

An advantage in logistics could show up in various ways such as storage, distribution, or inventory management.

The beloved retailer Costco is a prime example. Costco has the most efficient inventory system of any big box store thanks to such a narrow product shelf. For context, Costco carries about 4,000 SKUs (Stock Keeping Units) while a competitor of similar size, say Walmart, carries around 140,000.

These distribution advantages compound as a retailer gains more locations. The more volume you push through a system, the cheaper and better it gets which is why Costco is able to offer rock bottom prices.

New entrants face a brutal problem: they need scale to compete, but they can’t get scale without already competing. Any new players in a Costco territory would not be able to compete on price unless they took losses for years. It’s a classic chicken or egg issue.

Do you want to look like a financial genius to your Substack audience?

Share this post so your timeline knows you understand how to find good investing opportunities

Click the button right below and let’s all build wealth together