The Daily Buffett

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Navigating the Commodities Web

January 7th

Stocks of companies selling commodity-like products should come with a warning label: 'Competition may prove hazardous to human wealth.'

Warren Buffett

Commodities can seem like an appealing prospect for investing. Their tangibility, ubiquity, and essential nature to everyday life can make them appear as safe bets. However, the reality is often different.

Risks in investing in commodity companies arise from the nature of commodities themselves. They are largely indistinguishable from each other and their value primarily driven by the whims of supply and demand. In such a scenario, companies can face intense competition, which can eat away at profit margins.

This scenario underpins the significance of seeking businesses with a solid 'economic moat'— a competitive advantage that allows them to retain profitability amidst competition. This is particularly critical in the commodities market, where differentiation can be hard to achieve and maintain.

As savvy investors, approach commodity-based investments with serious caution. Always evaluate the competitive landscape, read the dynamics of supply and demand, and identify companies that have built durable economic moats. Success in investing often lies in navigating these intricate webs of market dynamics.

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