What’s better than a monopoly?
For more than three years, we’ve owned the stocks of Visa and Mastercard, the two dominant payment processors in the credit card industry. The chart below shows how they’ve performed over the last two years, both doubling the market returns for that stretch.
Visa and Mastercard for Two Years
Notice how the two lines dance around each other. Initially we thought Visa had an advantage over Mastercard, but as the chart shows the two companies are prospering together. They compete just enough to provide their customers a choice and keep the government largely at bay.
However, they are “rational” competitors. As Warren Buffett once said, “You can only be as smart as your dumbest competitor” and neither Visa nor Mastercard are run by stupid people. In fact, it is clear that the competition between the two firms sharpens the game at both.
So as they compete, they understand that the business has a massive tailwind as more of the world’s consumers qualify for credit cards and those that have them use them more each day. As cash and checks give way to credit card transactions, both companies can keep on winning.
This isn’t the only duopoly in Dock Street portfolios: think Google and Facebook in Internet advertising and Google and Apple in smartphone operating systems. It’s a pattern that has worked well over the last few years and promises to do the same well into the future.
Daniel A. Ogden
Disclosure: Dock Street Asset Management, Inc. and our clients may own securities. This article is not intended to be used as investment advice.