Battle Royal Markets

Over the last ten years, we’ve seen the rise of the Battle Royal markets and the shift away from one-on-one investing. There are all sorts of different battle royals, but the ones I watched as a kid were the biggest events in pro wrestling, where 12 wrestlers were put in the ring together and they attempted to toss each other out until one wrestler was left standing. Only the winner received prize money.

Being long-duration investors, we seek companies that are protected from competition and have a wide moat around their business. Like the water canal surrounding the castle in the middle ages and the draw bridge pulled back into the castle, a business’ moat fends off attacks.

Sometimes a moat comes from being the low-cost producer. Sometimes it is customer affection for your brand and decades of satisfied customers. Other moats are formed because you are willing to do something which other businesses do not want to do. The newest moats have been created by giving away the primary product (search, social media, free delivery) and using the first-mover advantage to aggregate a huge network effect via the internet.

The opposite of an industry with a moat is a battle royal. To us, this is a very competitive industry with many players are fighting over what they perceive to be a terrific future business opportunity. Industries in very competitive situations tend to see marginal profits move to zero. In our stock research efforts, we try to avoid “battle royal” situations in the stock market.

In the past, we have avoided the automobile industry, the energy space, the semiconductor companies, and most cyclical industries with heavy competition. When these industries gain favor, you seem to wake up with too many wrestlers in the ring. We do not think it is in our investors’ best interests for us to speculate about which wrestler would be left standing after all the others have been thrown out.

Where are today’s battle royals? The biggest ring with the most wrestlers is on the tech side of the stock market. Numerous public companies have crowded into the ring in artificial intelligence, data analytics, software as a service, delivery, internet advertising and the streaming of entertainment. Every week a new company goes public in these tech areas, effectively adding more wrestlers to a crowded ring! Economics demands that as the supply of something expands, that prices will fall even as demand stays the same. In stocks, as soon as trouble comes the tendency is for demand to disappear and, when supply surges as demand declines, share prices decline sharply.

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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