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What Warren Buffett Looks Out For When Investing

moatIn his 1995 Shareholder’s Letter, Warren Buffett revealed what he looks out for in businesses. He exclaimed that, “In business, I look for economic castles protected by unbreachable ‘moats.’ ” He went on to explain further in a 2007 Shareholder’s letter by saying, “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns.”

So what does he mean by that? Some of the businesses he invested in with an enduring moat include Coca-Cola, American Express and Gillette (now owned by Procter & Gamble).  With that in mind, let’s take a look at our little red dot called Singapore, and blue-chip companies that could also have a wide moat.

The first name that comes to mind is Singapore Exchange (SGX: S68), SGX. Any investor who wants to buy or sell shares in Singapore will have to go through SGX. SGX is a monopolistic business, and it is likely to remain as such for years to come. The company has had a consistently high net profit margin, for FY2012, the proft margin was 45%.

Another company that could fulfil the enduring moat definition is SIA Engineering Company Limited (SGX: S59), the engineering arm of Singapore Airlines (SGX: C6L). SIA is the flag carrier of our sunny island. Whatever aircraft that SIA buys or already owns, it has to be maintained by someone and the “someone” is SIAEC. Not only does SIAEC provide maintenance, it also undertakes repair and overhaul of aircrafts too, collectively known as maintenance, repair and overhaul (MRO). Furthermore, the planes owned by Scoot, Silkair, Tiger, and SIA Cargo are also maintained by SIAEC. It is noteworthy that SIAEC has a client base of more than 80 international carriers such as Cathay Pacific, United Airlines and Air Canada. SIAEC also has many joint ventures in its stable, including that with engine-maker, Rolls-Royce to provide repair and overhaul of its engines.

Last but not the least, we turn our eye to DBS Group Holdings (SGX: D05). Most Singaporeans will remember opening their first savings account with POSB (POSB merged with DBS in 1998).  DBS is the largest local bank in Singapore with 4 million customers. Once a consumer opens an account in a bank and deposit money in them, it is unlikely that he or she will close out the account in the near-term. By targeting kids in primary school, DBS is able to lock its customers in for long periods, and many adult Singaporeans today still own a DBS savings account.  DBS’s distribution network is also the largest in Singapore. This allows customers to deposit and withdraw cash easily from almost anywhere in the island. Other than in Singapore, DBS has presence in 15 markets with over 200 branches worldwide. It has earned the Global Finance’s “Safest Bank in Asia” accolade for five consecutive years, from 2009 to 2013.