What is a Economic Moat, and why is it so important that when finding a company to invest in, we look for this criteria so thoroughly?
Here’s an explanation quoted directly from Investopedia:-
| The term economic moat, coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Remember that a competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits. A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials. Very successful investors such as Buffett have been very adept at finding companies with solid economic moats but relatively low share prices. (To read more, see Competitive Advantage Counts.) |
Normally, firms which is capable of generating a consistant profit over a long period of time has some sort of economic moat.
And as such, these are a few financial metrics which I personal use to filter or scan out in finding companies for further research.
| Return On Asset (ROA) | >7% |
| Return On Equity (ROE) | >10% |
| Net Profit Margin | >3% |
| Free Cash Flow | >3% of revenue |
The keyword here is Consistency, preferably at least 10 years.
But still, not all companies which pass this filter/scan has some sort of moat.
We need to really understand how the company operates, and where their Real Economic Moat comes from, if they ever do exists.
Here are the 5 types of economic moats.
| Types Of Economic Moats | Explanation |
| Real Product Differentiation |
|
| Perceived Product Differentiation |
|
| Driving Cost Down |
|
| Locking Customers |
|
| Locking Competitors |
|
Recommended Reading
===========================================
tag: stock, market, investing, fundamental, analysis, economic, moat, value, growth, investor , warren, buffett
[...] Here are the 5 types of economic moats… [...]
[...] Here are the 5 types of economic moats… [...]
[...] Here are the 5 types of economic moats… [...]
[...] are the 5 types of economic moats… trends [...]
[...] that with certainty about RIM. Warren Buffet famously refers to these barriers to entrance as an “economic moat,” concluding an design of a physique of H2O that protects entrance to a [...]