Book Review: Porter’s five forces

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Porters_five_forcesPorter’s Five Forces by Michael E Porter

This is not an investment book at its core; it’s actually a management strategy that comes from a book published in the 1980s by Michael E Porter titled Competitive Strategy: Techniques for Analyzing Industries and Competitors. It was never intended for investors, but the insights it gives on why some companies succeed and others don’t are invaluable.

Hlelo Giyose of First Avenue Investment Management put me onto the concept of only investing in irreplaceable and impenetrable companies. The concept is simple: using Porter’s Five Forces one identifies companies that are likely to not only out-live their competition, but who will do so while making bucketloads of profits. Then we buy them when they’re cheap (that’s maybe the harder part, identifying cheap).

The five forces are:

  1. Competition in the industry
  2. Potential of new entrants into industry
  3. Power of suppliers
  4. Power of customers
  5. Threat of substitute products

Using these fives forces that drive companies, we can pick out the winners. For me personally it helped solidify a concept that I’d always used in my investing but never managed to really formulise. My long term portfolio is called “till death do us part” (find my portfolio here) with the plan that I buy wining companies that I will hold until they die or I die, whichever happens first. The point is to identify the winners and hold them forever and Porter’s Five Forces makes the process a whole lot simpler, as it offers a great framework.

The book itself is a heavy read and I would rather suggest hunting out one of the many excellent websites that deal with the concept and give serious consideration to including the five forces in your company selection process.

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