Monopoly: Why it's a Bad Game When Investing

As investors, we’re always bombarded with words or phrases like “moats”, “competitive advantage”, and “pricing power”.

At the end of the day, though, a lot of people say that investing success comes down to buying monopolies. That’s not been true for those of us in Asia (more on that later).

So what does that mean? Basically, you should be buying stock of companies that you can’t live without, which have limited competition in the sector in which they operate and can charge you whatever they want for the services they offer.

Remember that old guy who many in the investing community revere; Warren Buffett? Well, he actually said that his ideal business was one that had “high pricing power, a monopoly”.

However, is it suited to the technological age that we live in? Because, to me, it seems more appropriate for Boomers like Buffett who were raised in the era when railways and cable TV companies were the “next big thing”.

In today’s age, moats are overrated. Sure, they can charge whatever they want to consumers (or their clients) but they’ll most likely be disrupted at some point.

Technology monopolies risk being disrupted

That’s particularly true in the tech space more than others. Just take a look at Alphabet (NASDAQ: GOOGL) and its recent threat in the search advertising space from Microsoft Corporation (NASDAQ: MSFT) and its ChatGPT-powered Bing.

Same goes for Meta Platforms (NASDAQ: META), the company formerly known as Facebook.

The “Zucks” is the ultimate copycat (he’s totally THAT guy trying to have a peek at your exam answers and then pretending like he’s not when you catch him).

He’s leveraged the size of Facebook to copy every iteration of social media it has come across in the past.

That worked for a while but now the company is being threatened by TikTok and consumers shying away from ad companies collecting their data.

I mean, who’s really on Facebook now besides Boomers and bot accounts looking to swindle people?

In a way, getting so much profit – and cash flow – from one area (advertising) has hurt both of them. There’s been an inertia of sorts in the innovation sphere of these companies.

It’s no surprise, then, that their longer-term investment returns have been actually quite poor versus some of their tech peers.

For example, over the past five years, Meta and Alphabet shares have seen positive returns of +38% and +104%.

That might seem sweet but if you compare that to the five-year returns of Microsoft (+221%) and Apple Inc (NASDAQ: AAPL) – up +269% – it’s underwhelming.

Could those two be the next ones to be disrupted? It’s always a scenario worth considering.

Shunning monopolies when investing

Investing in monopolies, even in Asia, generally leads to poor outcomes for investors. Look at the oligopolies or duopolies that exist in Hong Kong.

The large property developers and conglomerates have suffered from being protected in their specific areas of operation.

For shareholders, that has meant shockingly poor long-term returns from companies that you would expect to thrive.

If you’re being pushed to innovate and actually come up with services to suit your clients – rather than just focused on squeezing as much profit as possible out of every dollar earned – then companies will likely see higher profits and margins in the future.

That’s something that all investors can buy into.