Key Takeaways

• Monopolies control their markets, leading to high profitability and stable returns.
• Investing in monopoly stocks can yield higher returns compared to competitive market stocks.
• Indian monopolies like IRCTC and HAL have shown strong performance due to government support.
• Near-monopolies also exhibit significant market control and investment potential.
• Careful analysis is necessary to identify which monopoly stocks provide the best long-term returns.

Investing In Monopoly Stocks Give Higher Returns – Imagine investing in a company as entering a kingdom. Some kingdoms constantly battle rivals, while others, protected by massive moats, remain secure and unchallenged. In the business world, these “kingdoms” represent two types of firms: perfectly competitive firms and monopoly firms. Competitive firms face fierce market battles, while monopoly firms dominate their markets with little to no competition. This blog explores the power of monopolies and whether investing in monopoly stocks can give higher returns.

Monopoly companies, like a kingdom with a moat, enjoy unparalleled market control and stability. Their ability to dominate the market leads to significant advantages in profitability and influence.

What Makes a Monopoly Company?

1. Ownership of Strategic Raw Materials: Companies owning essential materials, like diamond or coal mines, hold a significant market edge. For example, a company that controls a major source of an essential raw material can dictate terms and prices due to the lack of alternatives for competitors.
2. Exclusive Knowledge/Patent Rights: Firms with patented production techniques or exclusive licenses have a competitive advantage. A firm that holds a patent for a life-saving drug, for instance, can maintain high prices and exclusive market access until the patent expires.
3. Tariff Barriers: Government-imposed import duties can protect domestic firms from foreign competition, granting them monopoly power. These barriers ensure that domestic companies can thrive without the threat of cheaper foreign imports.
4. Limited Market Size: Sometimes, the market size can only support one firm, allowing it to produce at the lowest average cost and dominate the market. For instance, a small town may only support one electricity provider due to the high infrastructure costs.
5. Limit Pricing Policy: A firm may set low prices to prevent new competitors from entering the market, leveraging their lower production costs. This strategy can deter potential entrants by making it unprofitable for them to compete.

Why Are There So Few Monopolies?
Despite their market dominance, true monopolies are rare. Government regulations, potential competition, and technological advancements prevent any single company from having absolute control over a market. In India, there are only two complete monopolies: IRCTC and Hindustan Aeronautics Limited (HAL).

Example: IRCTC and HAL

• IRCTC: Controls 100% of railway services and catering in India. It is the only authorized entity for railway ticketing and catering services, making it a complete monopoly in its field.
• HAL: Holds a monopoly over defense aircraft production in India until 2026. It benefits from government ownership and preferential treatment due to its strategic importance.

Both companies have shown strong performance due to government support, reflecting in their stock returns.

Are Monopolies Good to Invest In?
Monopolies should, theoretically, be excellent investments. Their market control allows them to charge high prices, resulting in great profit margins and consistent dividends. To explore this, let’s look at the stock performance of Indian monopolies and near-monopolies.

Exploring Monopolies in India and Their Stock Market Returns
IRCTC and HAL: Over the past five years, both have outperformed major indices like NIFTY 50 and NIFTY 500 Multi Cap 50:25:25. Their strong performance is attributed to government support for infrastructure, railways, and defense.

Near-Monopolies in India: Companies like IEX, MCX, and Syngene International dominate their respective markets. For example:

• IEX controls 95% of short-term electricity contracts.
• MCX holds a 92% share in the commodities exchange sector.
• Syngene International commands 50% of the CRAMS market.

Performance Analysis of Monopoly Stocks
When comparing the cumulative monthly returns of monopoly stocks to indices over a 15-year period, 13 out of 20 monopoly stocks outperformed the NIFTY 50, and 9 outperformed the NIFTY 500 Multi Cap.

Basket of Monopoly Stocks
We created three baskets of monopoly stocks and compared them to the NIFTY 50 and NIFTY 500 Multi Cap:

1. 20 Monopoly Stocks: Gave a 20.92% CAGR.
2. Top 13 Monopoly Stocks: Gave a 25.84% CAGR.
3. Top 9 Monopoly Stocks: Gave a 27.82% CAGR.

These baskets significantly outperformed the NIFTY 50 (9.66% CAGR) and NIFTY 500 Multi Cap (10.69% CAGR).

Variation of Monthly Returns for Monopoly Stocks
Plotting the average monthly returns over 15 years, monopoly baskets consistently performed better than the NIFTY 50 and NIFTY 500 Multi Cap. The median average monthly return for all 20 monopoly stocks was 2.05%, 2.53% for the top 13 basket, and 3.07% for the top 9 basket, compared to 0.86% for the NIFTY 50 and 1.47% for the NIFTY 500 Multi Cap.

Are These Returns Due to Random Luck or Chance?
We examined whether the returns from monopoly stocks were due to random chance or inherent advantages.

Performance of Monopoly Stock Baskets vs. NIFTY 50

• Inclusive of Outliers: The 20-stock basket’s outperformance over the NIFTY 50 is not statistically significant, suggesting the observed performance difference could be due to random chance. The 13 and 9 stock baskets, however, show statistically significant higher returns.
• Exclusive of Outliers: Excluding outliers, the 20-stock basket’s results are close to being statistically significant, indicating a tendency for higher returns but not enough evidence to confirm it definitively. The 13 and 9 stock baskets continue to show statistically significant higher returns compared to the NIFTY 50.

Performance of Monopoly Stock Baskets vs. NIFTY 500 Multi Cap

• Inclusive of Outliers: The 20-stock basket’s outperformance over the NIFTY 500 Multi Cap is not statistically significant. The top 13 stock basket’s higher returns are close to being statistically significant, while the top 9 stock basket shows statistically significant higher returns.
• Exclusive of Outliers: Excluding outliers, the 20-stock basket’s results are close to being statistically significant. The 13 and 9 stock baskets show statistically significant higher returns, indicating that the performance difference is unlikely to be due to random chance.

Practical Tips for Investing in Monopoly Stocks

1. Research the Market: Understand the company’s market position and barriers to entry.
2. Analyze Financials: Look at profit margins, cash flow, and dividend history.
3. Consider Government Influence: Government policies can significantly impact monopoly stocks.
4. Diversify Your Portfolio: While monopolies are attractive, diversification reduces risk.
5. Monitor Technological Advancements: New technologies can disrupt monopolies.

Investing in monopoly and near-monopoly stocks presents a compelling opportunity. These companies leverage market power, achieve economies of scale, and sustain profitability over long periods. The significant returns from baskets of monopoly stocks suggest that companies with dominant market positions can generate higher returns. However, investors should be aware of market dynamics and regulatory factors that could impact future performance.

We’d love to hear your thoughts! Leave a comment below or share your experiences investing in monopoly stocks.