Microsoft vs Apple

Five years from now, we can confidently bet the Microsoft will stay a leader but you can't say the same about Apple.

The problem with Apple is that it lacks a robust competitive edge for the long run. Apple's competitive edge currently stems from creative innovative design and effective marketing. The main weakness of Apple is that its products have substitutes. There are plenty of alternatives to iPods, iPhones and iMacs out there from companies equally ambitious.

While Apple has effectively stayed one step ahead of the competition in consumer electronics, it as a risky strategy for the long term. A couple of slip ups from Apple's design department can allow the competition to provide superior products for a year or two, and Apple will lose their magic. While this isn't inevitable, it is plausible scenario that the company can face making the stock a risky investment at high valuations.

Microsoft on the other hand has little risks of going anywhere because they are a monopoly with a product that has no substitutes. If Microsoft dropped off the face of the earth one day, the world economy will collapse because business and home computers are dependent on Windows.

In the software industry, with all the compatibility issues, monopolies provide impermeable network effects. If you want to develop software, you have to make it for Windows to be successful, while making it run on a Mac or Linux is a secondary concern. This makes Windows a more attractive OS over the competition ensuring that it will be a leader. It will be near impossible to break this competitive advantage even if you have all the money in the world.

Microsoft is also much more effective on running a business. Their focus group tested strategies aren't sexy, but they bring in the money at the end of the day, which is the most important factor in choosing a stock.