Warren Buffetts Key to Successful Investing

Buffett understands a thing or two about picking winning stocks, and competitive advantages are at the center of his investing strategy. With this in mind, let's look at three major sources of competitive advantages and how they impact returns for investors in Apple , eBay , and Wal-Mart.

Apple: A powerful iBrandThe tech industry is notoriously dynamic and competitive, so the winner of today can easily become the loser of tomorrow if the competition develops better and more innovative products. Fortunately for investors in Apple stock, the company's competitive position is not solely based on quality and technological factors; brand differentiation is a huge advantage for Apple.

Forbes lists Apple as the most valuable brand in the world, with a jaw-dropping estimated value of $124.2 billion. This is not only a matter of popularity and recognition among customers, according to the magazine: "The most valuable brands are ones that generate massive earnings in industries where branding plays a major role."

Source: Apple.

Brand value and pricing power mean Apple can charge higher prices than the competition. In times when most smartphone manufacturers are aggressively competing on price to protect their market share, Apple delivered higher average selling prices in the iPhone segment during the last quarter on the back of higher contribution from the new iPhone 6 and iPhone 6 Plus models in the product mix.

To put the numbers in perspective, Apple enjoyed an operating profit margin in the neighborhood of 29% of sales during the last quarter, more than double the operating margin produced by Samsung, which was approximately 13% of revenue. This undeniably has clear and important implications for investors in the industry.

eBay and the network effectThe network effect happens when a product or service becomes more valuable as it gains users. At the same time, a more valuable service attracts even more users, creating a self-sustaining virtuous circle of growth and increasing competitive advantage. Think about the telephone or social networks, for example: the more the merrier, since you want to be able to communicate and connect with as many people as possible.

eBay benefits from the network effect in both its Marketplace e-commerce platform and its PayPal digital payments system. Buyers and sellers attract each other in e-commerce, since having plenty of potential optionsis clearly a big plus. The same goes for PayPal. As it becomes morepopular among customers, more merchants need to accept it, and customers want to use a payment system that is accepted by many merchants.

Source: eBay.

PayPal is growing much faster than Marketplace lately, so the company is going to spin off the digital payments division in order to optimize shareholder value and allow both businesses to better focus on their specific needs. It will be important to watch how the two segments perform as separate companies after the spinoff.

On the other hand, both PayPal and Marketplace have already gone through their respective inflection points when it comes to size and popularity, so they are benefiting from the network effect. As of the last quarter, the company had 152.3 million active buyers in its e-commerce division and 156.9 million active payments accounts. This represents a considerable competitive advantage for investors in eBay.

Wal-Mart: Size matters Size is a crucial competitive advantage in the discount retail industry, and Wal-Mart is the biggest retailer in the world, with sales of more than $480 billion per year. This massive scale allows Wal-Mart to negotiate aggressively low prices and flexible financial conditions with suppliers, which the company translates into competitive prices for its customers.

The retail industry is going through a challenging period, as demand is lackluster and industry headwinds are hurting Wal-Mart's ability to generate sales growth in mature markets. However, Wal-Mart is focusing on e-commerce and smaller-format stores to improve performance, and there are reasons for optimism in these areas. Comparable sales in the Neighborhood Market division increased by a strong 5.5% during the last quarter, while global online sales surged 21% on a constant currency basis.

Source: Wal-Mart.

Warren Buffett is all about competitive strengths, and scale is a major source of competitive advantage in discount retail. So it's no surprise that Buffett's Berkshire Hathaway owns shares of the biggest retailer on the planet.

The article Warren Buffetts Key to Successful Investing originally appeared on Fool.com.

Andrs Cardenal owns shares of Apple and Berkshire Hathaway. The Motley Fool recommends Apple, Berkshire Hathaway, and eBay. The Motley Fool owns shares of Apple, Berkshire Hathaway, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.