Why Moats Matter to Equity Investors
Successfully picking stocks requires a number of skills to be deployed;
- Analysing profitability, financial strength and cash flow
- Assessing the track record and expertise of management
- Judging whether a firm has a sustainable, competitive advantage
- The third of these is where we are focusing this time. Warren Buffett once encapsulated the concept by saying that successful firms have “wide economic moats” – but what did he mean?
How firms build wide moats
If a firm is going to thrive and see off its competitors over the long-term, it needs to be able to demonstrate four characteristics;
- Cost advantage
- The “network effect”
- Barriers to entry
- High switching costs
Much has been written on each by a host of commentators over the years, so here is a quick snapshot. Please contact an Investment Manager if you would like to know more.
The "network effect"
Barriers to entry
High switching costs
If you would like to discuss the strength of the moats around some of the stocks in your portfolio, please contact an Investment Manager.