All I want in life is an unfair advantage.
I'm not sure who first said that maxim, but it's one of the keys to successful investing. Companies with unfair advantages are some of the best investments you can ever make. Some unfair advantages stem from government actions, such as the virtually unlimited free money that banks now receive. Other companies' unfair advantages have been built up over many years of being in business, or within the impenetrable niche a company has learned to dominate.
In the investing literature, unfair advantages are called moats. Warren Buffett has made billions by looking for a strong moat before committing to an investment. Companies that have developed defensible market positions are the best investments to weather Wall Street's ups and downs. When you combine this rare quality with strong growth prospects, you've got the potential to make a killing.
Of course, not all moats are created equal. Here are five that have serious long-term dominance potential.
Visa runs the largest retail electronic payments network in the world, with more than 15,000 financial institutions as customers and more than 1.5 billion cards issued. Anytime someone in the world uses a Visa card to make a purchase, Visa earns a few cents. With more than 60 billion transactions last year, that pocket change quickly adds up. While competitors such as MasterCard and Discover have been around for years, new entrants such as eBay's Paypal have yet to make a dent in Visa's dominance. Visa's worldwide network will ensure its rule over the payment-processing business for years to come.
2. Philip Morris
Philip Morris is the most powerful tobacco company in the world, with seven of the world's top 15 brands, including top-seller Marlboro. In 2009, the company had an estimated 26% market share in its world markets -- excluding China, where only government-owned China National Tobacco is allowed to operate, and the U.S., where the company's former parent Altria
3. Sirius XM Radio
When regulators approved the merger of Sirius and XM in 2008, one of the most dominant media companies of the decade emerged. While the company has some issues from its high debt load, the benefit of being the only game in town when it comes to satellite radio should more than outweigh this. Sirius XM has nearly 20 million subscribers, which approaches Comcast's 22.9 million video customers, and is better than Netflix's
In a recent study by professors at Baylor College of Medicine, people were unable to distinguish Coke and Pepsi in a blind taste test. However, Coke's brand was found to be so strong that in a separate non-blind taste test, "subjects overwhelmingly preferred drinks that were labeled as Coke, no matter what cola was actually delivered through the tubes."
How does this happen? Coke ads are designed to trigger emotions and the felling of nostalgia. With consistent advertising year after year, this builds into a formidable emotional relationship with consumers, which other purveyors of sugar water simply can't compete against.
At a press conference in May of last year, Warren Buffett and Charlie Munger remarked "Google has a huge new moat. In fact I've probably never seen such a wide moat." Being the first company to combine search and advertising has led Google to a dominant 65% share of the U.S. search market and a market cap of $188 billion.
Similarly, Baidu was the first mover in the Chinese market.The company also got a helping hand from the Chinese Communist Party, which has led it to its astounding 73% share of the Chinese search market. Currently, only about a third of the Chinese population is online. As the Chinese economy continues to develop, and Chinese consumers gain more wealth, Baidu is sure to be a winner for years to come.
While these five companies aren't recommendations, they are a good place to start. For some opportunities that the Fool does recommend, click here to get our free report, 5 Stocks The Motley Fool Owns -- and You Should, Too.
Dan Dzombak recommends you read The Best Investment Advice You Will Ever Get if You Have Under $100k. He does not own shares in any of the companies mentioned. His musings and articles he finds interesting can be found on his Twitter account: @DanDzombak.
Discover Financial, Google, and Coca-Cola are Motley Fool Inside Value recommendations. Baidu and Google are Motley Fool Rule Breakers picks. eBay and Netflix are Motley Fool Stock Advisor recommendations. Philip Morris International is a Motley Fool Global Gains pick. Coca-Cola is a Motley Fool Income Investor choice. Motley Fool Options has recommended a bull call spread position on eBay. The Fool owns shares of Altria Group, Coca-Cola, Google, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.