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Why Investing in Monopolies Pays

Investing in monopolies is a good way to make money. But it can be difficult for U.S. investors. Where to find them? Look overseas.

Investing 101 Class Chalkboard

When you think about investing in monopolies you mind may naturally drift to the game Monopoly.

Growing up, our Monopoly games were rough and tumble.

Tensions ran high because our attitude was a bit like the Kennedys - the difference between second place and last place was nothing at all.

Monopoly is a great game for many reasons. One is that it reflects personality traits so well.
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Most of my siblings cautiously managed their cash and picked up random properties. This allowed them to stay in the game for a long time but made ultimate victory unlikely.

As for me, I always went for the kill with a strategy of feast or famine. Either crush opponents with hotels on a great monopoly like Boardwalk and Park Place or crash and burn and happily head out to play basketball.

Perhaps a strategy in the middle is best, but this raises an interesting question: Just why is it that so many people are bad at Monopoly?

I think it is because we are taught at a young age that tycoons like John Rockefeller or Bill Gates, or others who are adept at cornering markets, are greedy and bad guys. This belief is compounded when we go to college and Socialist-minded economics professors rant about evil monopolies and the need to “regulate” the free market.

Apparently, Carlos Slim, one of the wealthiest tycoons in the world, never studied economics.

Carlos Slim’s fortune was built on the back of Mexican telecom monopolies and, as a hobby, he bailed out the New York Times.

Companies controlled by Slim have captured 80% of Mexico’s telephone lines, 70% of the cell phone market, and account for an incredible 34% of the value of the country’s entire stock market.

Maybe monopolies aren’t all that bad? So investing in monopolies makes sense.

Investing in Monopolies? Look Overseas

But that’s not always easy for U.S. investors. Lasting monopolies are tough to find in America but there are plenty of them in emerging markets.

Why?

Well, most emerging and frontier markets are a fascinating blend of “wild west capitalism” and “state capitalism.”

Early movers can gain enormous economies of scale, making competition difficult. Governments tend to keep big western multinationals at bay with import and investment restrictions.

Then there are many of these monopoly-like, state-owned and controlled giants whose stocks are publicly listed. I guess the best way to convince government regulators to protect your markets is to be owned by the government itself.

But there are also plenty of private companies that don’t have a complete monopoly but profit from some edge that gives them a partial monopoly. Business professors refer to these as “moats.”

They can be based on relative size, government ownership, cost advantage or some intangible benefit like a dominant brand name.

For example, perhaps they have partnered with a giant multinational offering investors the best of both worlds like Nestle India or Unilever Indonesia (UNLRF). Like Rockefeller, they have the cash and dominant market position to buy out all potential competitors.

Or perhaps they are just very well-run companies head and shoulders above their competitors? I call this a market monopoly.

Whatever the edge, these companies are attractive to investors for only one reason – their ability to deliver consistent and strong revenue and profit growth.

So my advice is this – don’t be shy about investing in monopolies.

I always keep a sharp eye out for monopoly-like opportunities as I scour the world serving subscribers of my Cabot Explorer advisory. To learn what other international stocks I’m currently recommending, click here.

Do you currently hold positions that enjoy monopoly-like advantages over their competitors? Let us know in the comments below.

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*This post has been updated from an original version, published in 2019.

Carl Delfeld is a member of the Cabot investment team, and chief analyst of Cabot Explorer.