Wide Moat Investing is a strategy of buying the stock of companies that have a sustainable competitive business advantage. This advantage makes it difficult for competitors to wear down and take market share and profit. This term is taken from a moat around a castle. The larger the moat the harder it would be for an enemy to attack the castle. The term wide moat investing was coined by Warren Buffet.
There are five characteristics that a company must possess for it to be considered having a Wide Mode.
Intangible Assets
These will include brands, patents and regulatory licenses. A strong brand name will increase the customers willingness to pay up for their products. For example, Coca cola has a strong brand name that helps it receive a better return from other companies that sell the exact same product. Patents will protect the entrance of competitors into their market. An example would be a pharmaceutical company holding a patent for a specific drug only they can make and sell. Government Regulation will also hinder competition from entering the market.
These will include brands, patents and regulatory licenses. A strong brand name will increase the customers willingness to pay up for their products. For example, Coca cola has a strong brand name that helps it receive a better return from other companies that sell the exact same product. Patents will protect the entrance of competitors into their market. An example would be a pharmaceutical company holding a patent for a specific drug only they can make and sell. Government Regulation will also hinder competition from entering the market.
Switching Cost
When the cost of switching exceeds the expected value and benefit of not changing. This doesn’t have to only be determined by price. An example of this is software that you may be able to find cheaper from another company. But because of the hassle of switching and training time it takes to get the new software up and running it may not be worth it for you to change.
When the cost of switching exceeds the expected value and benefit of not changing. This doesn’t have to only be determined by price. An example of this is software that you may be able to find cheaper from another company. But because of the hassle of switching and training time it takes to get the new software up and running it may not be worth it for you to change.
Network Effect
When the value of a particular good or service increases for both new and existing users as more customers use that good or service. A good example of this is Facebook. When it started it didn’t have a very large network, whereas now they have one of the largest networks in the world. You can also look at the credit card network and how they have increased over time to the power houses they currently are.
When the value of a particular good or service increases for both new and existing users as more customers use that good or service. A good example of this is Facebook. When it started it didn’t have a very large network, whereas now they have one of the largest networks in the world. You can also look at the credit card network and how they have increased over time to the power houses they currently are.
Cost Advantage
Companies with wide moats have sustainably lower costs than their competitors. Sustaining these low costs can come about in a number of ways. An example is economies of scale driven by large operations. The more units produced the lower the cost per unit.
Companies with wide moats have sustainably lower costs than their competitors. Sustaining these low costs can come about in a number of ways. An example is economies of scale driven by large operations. The more units produced the lower the cost per unit.
Efficient Scale
When a niche market is effectively served by one or a small handful of companies, efficient scale may be present. For example, midstream energy companies such as Enterprise Products Partners EPD enjoy a natural geographic monopoly. It would be too expensive to build a second set of pipes to serve the same routes; if a competitor tried this, it would cause returns for all participants to fall well below the cost of capital.
When a niche market is effectively served by one or a small handful of companies, efficient scale may be present. For example, midstream energy companies such as Enterprise Products Partners EPD enjoy a natural geographic monopoly. It would be too expensive to build a second set of pipes to serve the same routes; if a competitor tried this, it would cause returns for all participants to fall well below the cost of capital.
What are the Positives of a Wide Moat?
Wide Moats have long duration’s of positive returns. Wide Moats Focuses on outperforming the Market Over time of which it has done so.
Also Wide Moats reduce risk by investing in mostly in large Cap companies (large cap companies are companies with a market cap of 10 billion or higher) tend to be less volatile especially in tough times.
Over the years this theory has been performing as predicated you can take a look at the comparison of Wide Moat Focus vs the US Market you can see how over time the return difference keeps getting larger and larger.