Barriers to entry
Cuban's advice to people with lots of money to invest is to hire somebody to manage it. "It cannot be your friend," he added. "It's got to be somebody who's done it for big time people."
His skepticism about clothing labels, restaurants and liquor brands stems from the fact these industries are simply too easy to get started in. “[Do] you know one athlete’s label that’s done any good?” he asked Sharpe, who admitted he couldn’t name a successful example. “You know clothing companies? ... It’s hard. Those businesses are hard because there’s no barriers to entry.”
According to the Corporate Finance Institute, a barrier to entry — such as government regulations, licensing requirements, technological challenges or intellectual property — can limit competition and allow companies who overcome the barriers to enjoy better profitability.
The weight-loss drug Ozempic is a good example. Pharmaceutical giant Novo Nordisk has spent billions of dollars developing the drug’s patent, getting it approved by the Food and Drug Administration and building manufacturing facilities. Only a handful of firms can match this level of resources, which means competition for the drug is sparse. Novo Nordisk has seen sales and profits surge since the drug launched.
In contrast, launching a clothing label or restaurant requires significantly less investment, expertise and regulatory approvals. Nearly anyone, regardless of experience, can launch one and it's hard for investors to know if the product or business is special enough to stand out and succeed. Industries overflowing with competitors limit the pricing power of even the best players.
The average profit margin for a full-service restaurant, for instance, is between 3% and 5%, according to Indeed.
Investors and entrepreneurs should keep an eye on the barriers to entry and whether they are backing a product that is truly exceptional.
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Read MoreBoring businesses
One could argue that being boring and unglamorous is, in a way, a form of barrier to entry. Not a lot of people dream of launching waste disposal firms or pest control services, for example. For those willing to abandon bragging rights, these industries can prove lucrative.
Legendary investor Warren Buffett has built a fortune by betting on so-called boring businesses and taking the time to thoroughly research them. At the end of the second quarter of 2024, his portfolio included Chubb Limited, an insurance firm, DaVita, a kidney disease and dialysis treatment provider, and SiriusXM, a radio broadcaster.
These businesses probably won’t get mentioned in a rap song or featured in the pages of a magazine, but the Oracle of Omaha has clearly seen something to make him believe they’re undervalued and overlooked.
Similarly, investors can keep an eye on other "boring" industries with companies that can turn a profit, such as logistics, utilities, energy, and enterprise software for potential opportunities.
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