We did a little mythbusting on one of the burning questions of the moment. As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk. Since its inception in 2015, the ETF has returned 15.24%, including distributions.
An example of an economic moat in action
Buffett highlighted the importance of investing in companies with wide moats, as they are better positioned to maintain their edge and generate consistent profits. An economic moat is a metaphor that refers to businesses being able to maintain a competitive advantage over their competitors in order to preserve market share and profits. Any method that a company uses to maintain a competitive edge can be considered an economic moat.
Competitive advantages that accrue from scale typically refer to supply-side advantages, such as the purchasing power of a large restaurant or retail chain. But advantages of scale exist on the demand side, too; they are commonly referred to as network effects. They are at work when a service becomes more valuable to all of its users as the service adds more users. Intangible assets are any proprietary assets that a company has that can’t be touched but can significantly impact sales. This includes things like proprietary technology, patents, brands, and licenses that allow a company to protect its production process and charge premium prices.
In the modern world of share trading, this imagery takes a nuanced turn, thanks to Warren Buffett, the celebrated investor. He likened a company’s defining advantage over its rivals to this historic protective moat, coining the term “economic moat” to describe a business’s shield against competitive threats. A competitive advantage is a set of conditions or circumstances that give a company an edge over its rivals—usually by producing superior products and services compared to its competition. Having a competitive advantage can give a company more market share and higher revenues as it serves a certain part of the market better than other companies. A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials.
Supply chain stocks are a hot topic right now because global supply chains have come under severe pressure in recent years. David George and Alex Immerman, partners at venture capital firm, a16z, when talking about gross margin, they pointe out how those alone are misleading. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
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Looking forward, it is likely that Google’s competitive advantages will have to sustain themselves in spite of regulation, rather than as a result of it. In search, advertising, and Google’s other software businesses—such as Android, Maps, and Gmail—there is strong brand recognition and loyalty, which both contribute to the company’s moat. The durability of these contributions is likely not as strong, however. From this perspective, it is unlikely that Google’s brand contributes significantly to its moat. Users mostly prefer Google search due to the quality and reliability of the results.
Examples of ASX companies that benefit from a moat
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- They extend for some 16,000 kilometres in all, in a mosaic of more than 500 interconnected settlement boundaries.
- An economic moat refers to a company’s ability to maintain an advantage over competitors.
- It also means that the quality of a company’s goods and services must meet the demands of consumers.
- Understanding the nature of a company’s moat can offer investors deeper insights into its potential longevity and competitiveness.
While economic moats can stem from financial differentiators such as having lower operating costs, they can also arise from less tangible sources such as brand strength or a strong corporate culture. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have. When a particular market is best served by a limited number of companies, those companies can achieve near-monopoly status (and a wide economic moat). Utility firms are a good example of this because it is necessary for them to serve electricity and water to all customers in a single geographic area.
They were supposed to be very “moaty” businesses you buy and never sell. It included great companies like Coca-Cola, American Express, McDonald’s, and IBM. But they were trading at such expensive prices that when the stagflation of the 1970s arrived, they dramatically underperformed the market. A company may have one or several strong moats over all its competitors, but the whole industry in which it operates could be going down. There’s no point in being the biggest and best steam train maker if they are being replaced by more advanced technology.
When the enemy is at your door, having a moat can help protect your castle from rival kingdoms, and the same is true for businesses. A competitive moat is just one type of moat that can help keep your competition at arm’s length and your sales strong. An important test for Buffett and Munger when assessing the durability of an economic moat is whether a competitor with a massive checkbook could replicate the business in question. Many well-funded competitors have unsuccessfully attempted to storm Google’s castle, particularly in the search business.
The moat is widening a little bit that things are all the time changing that moat in one direction other ten years from now you can see the difference. Our managers are the businesses we run I’ve got one message to them you know which is the widening moat. Large companies that compete in a given industry tend to dominate the core market share of that industry, while smaller players are forced to either leave the industry or occupy smaller “niche” roles. This can be non-tech companies as well, like for example, Disney or Nintendo’s intellectual property rights are unique and highly valuable. To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a ‘top share’ is always defined by the largest market cap at the time of last update.
Intellectual property, as a contributor to Google’s moat, is difficult to assess. The advantages that result from intellectual property often refer to patented technology, such as drug formulas. Google owns many patents, but it is not clear that any of these patents necessarily what is a moat keep competitors at bay.