Maybe you’re a Game of Thrones enthusiast, maybe you’re not. Either way, you are most likely aware of what a moat is. You know, the classic pit filled with water which surrounds nearly every storybook castle…
The concept of a moat is incredibly simple. If invaders are forced to deal with a challenging obstacle before they can attack the castle, the likelihood of a successful invasion is decreased. The concept is thousands of years old, but it has recently been given a new application in the world of security analysis and finance.
The term economic moat was coined by none other than the Oracle of Omaha, Warren Buffet. Buffet amassed his considerable fortune by investing in companies he believed to be undervalued by the stock market. In evaluating countless companies, he found a common trait which he dubbed the economic moat.
The term is relatively straight forward. It refers to the ability of a company to maintain competitive advantage. In other words, this is viewed as a buffer against competition meaning that companies with an economic moat are better suited to face competition. These advantages could take many forms, ranging from cost advantage over the competition to intangible assets such as trademarks or brand names.
The economic moat is key to Buffet’s stock strategy because of his focus on long term holdings rather than short term gains. Buffet searches for companies which he can hold indefinitely, and companies which are strongly situated against competition are the perfect candidates.
Buffet has a famously large stake in Apple stock. Apple embodies prime examples of the economic moat. The brand itself has become so reputable and prestigious that the name “Apple” is an advantage in the smartphone market. Another example would be their proven track record of innovation (which seems to be lacking a bit in recent years… iPhone XR “cough cough”) and sustained market dominance. These competitive advantages provide enough of a buffer from the threats of competition that they form an economic moat.
Learn more: https://www.fool.com/knowledge-center/economic-moat.aspx