Monday, August 3, 2009

A Darned Good Point About Margin Erosion

In the blog "Reflections On Value Investing," Shai Dardashti puts forth a very good point about competitive moats that don't erode. Companies with high returns on equity, on the basis of a solid brand name, don't have their superior ROE eroded if the raw cost difference between the brand name and a cheaper alternative isn't enough to get many consumers switching. Why switch to the generic if it means only a $20 saving per year, unless it's important to you to shop at a discount? Some people do, but many don't. Others consider the risk of lower quality to be not worth saving a few bucks over, even if that risk is largely illusory.

It's a post that well worth reading, and thinking over, particularly if you're an economics graduate.

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