Legendary investor Don Yacktman, President and Co-Chief Investment Officer of Yacktman Asset Management, delivered the keynote at Wide-Moat Investing Summit 2013 on July 9th. During the hour-long session, Don shared countless invaluable insights on wide-moat investing as well as his latest investment idea. Below is an excerpt from the session that highlights Don’s thinking on how companies build and sustain competitive advantage:
“Ultimately, what you’re trying to do in business is create an unfair competitive advantage. There are exceptions in mining and stuff like that where you might, through luck, create a low-cost alternative source of your particular product or your particular commodity.
But, normally, there’s economies of scale that create the moat that are natural. Usually, it’s a market share thing. The Boston Consulting Group, many years ago, did a lot of studies on what they called the experience curve and this applies more to manufacturing and things like that, but what they found was that every time you doubled the previous number of units you produced, you lowered cost in real terms by about 30%.
So what happens is, and let me use Apple [AAPL] as an example, because Apple’s been kind of in the forefront for the last few years. They’re a great dynamic company and very inventive, but I’ve been leery of Apple because by doing what they’ve done, by holding prices up and yet their costs are continually going down, because as you produce more units your costs will go down. The way you win long-term, in my opinion, is by bringing your pricing down with your cost curve so that you prevent other people from coming in underneath your umbrella. Because if you hold prices up, you create an umbrella and, eventually, other people will come in and start taking market share.