When we speak of the moat, Warren Buffet is one of the first names to click in the mind. The Oracle of Omaha was the one who used the term moat and coined it into the economic moat which means the ability to maintain a competitive advantage over its competitors. As of present, the word economic moat has become a marker for top companies
But what if we were to say that moat gets its definition from the medieval times? Yup, the word moat has had a different beginning and we’ll brief you on it down below.
What is a Moat?
If you have been one of the history buffs, then moat may be a word pretty known to you. Nevertheless, during medieval times, a large hole used to dig all around the castle and was filled with water. The wide and deeper the hole, the more protected is the castle. Moat is that safety arrangement or the hole that helps protect the castle against any intruders and attackers.
The same analogy was later on used by Warren Buffet about which we spoke up earlier in this article and was coined as an economic moat. Let’s have a look at it.
What are economic moat and wide-moat stock?
As is the case of the moat where the castle tends to have a competitive advantage over its attackers, similarly economic moat allows for a competitive advantage against its competitors. An economic moat is a metaphorical one and showcases the strong financial performance of the company. When a company tends to have an economic moat, the competitors will find it difficult to dethrone it.
Companies with wide economic moat tend to have a sustainable competitive advantage. Ideally, any investor wishes to invest in those stocks which have steady growth and ability to stand the market downtime to come up big. There are quite a few companies that enjoy this level of an economic moat. The shares of these companies which enjoy the economic and competitive advantage tend to be known as wide-moat stocks.
Why buy wide-moat stocks?
When it comes to stock investing, companies with wide economic moat tend to have a substantial advantage over others. A lot of smart investors opt for wide-moat stocks when it comes to investing as the wide moat stocks have plenty of benefits. Take a look at them.
- Strong Brand Presence: Companies with economic moat tends to have a strong brand presence. Think of the FMCG sector, the aura that ITC and HUL (Hindustan Unilever Limited) have created around or say Nestle with their product lines. Many products on offer from these brands have such an economic moat that competitors can hardly match their level. These companies tend to stay afloat and stand steady for a long haul. Even after the debacle of Maggi in 2015, the company still bounced back and has been a strong player. The strong brand presence gives you leverage and will keep your investment value secure and rising.
- High-Profit Margin: Companies with wide economic moat have cost advantages. To say, it’s not that there are no companies with similar product lineage or services in competition to the wide moat companies. There are plenty of them but the scale of functioning is pretty large for the companies with wide economic moat and that gives them a cost advantage. That translates to higher profit which means the company will be ideally a good one to invest in.
- High Reliability: Although the market is everchanging and dynamic in nature, wide moat stocks enjoy a privilege that no other can. They have a competitive advantage to the last downturn in the market and even survive the harshest of situations. While many other companies may wind down, wide moat stocks will continue to be around. So if you invest in these, your investment will be reliable and be around for the long haul.
- Better returns: When you look around in the market, the returns vary from one stock to another. Any company which is fundamentally strong will always have a steady hand in the stock market. Unbeknownst to either fluctuations or dips, the wide moat stocks tend to continue on their steady path. If you look at the return side of it, they tend to provide better returns in comparison to other companies. And the great thing about it, the returns continue along regardless of the market sentiments. As an investor going for a wide moat stock is a must as its benefits outweigh any other stocks in the market.
How to find wide-moat stocks?
Normally the wide moat stocks are easy to find out. As they tend to stand out easily. But merely going by the name won’t suffice as there are different parameters that you should look at. So if you’re looking to invest in wide-moat stocks, here’s how you can find them.
- Brand Awareness: One thing that is similar for all wide-moat stocks is that those companies tend to have brand recognition in the market. Whether it’s a segment leader or a major player in the market, they tend to have that aura of awareness about them. To say, take the names of ITC, HUL, Infosys and more. All of these names are familiar ones. That’s one marker for you if you want to go for the wide moat stocks.
- Earnings performance during different phases: When you are looking for wide-moat stocks, you have to examine the economic performance of the company during different phases. Look for the earnings and economic performance during the bullish and bearish economy. A company with economic moat will have a resilient performance during tough times and all.
- Compare the financial performance against competitors: Pit the financial performance of the company against its competitors. Look at the fundamentals of the company. Look for the revenues and expenses and identify the earnings. If there seems a big difference between the company and its competitors then it will be wide-moat stocks.
- Company and their USP (Unique Selling Proposition): As we mentioned above, the companies who enjoy economic moat tend to have market domination and brand entity. These companies have brand awareness among people and are pretty known for it. To say, ITC, HUL, Nestle, all of them are the segment leaders in their product and service line. Their USP was in providing the people with products that went onto give them the popularity and now they hold that substantial advantage over their competitors.
Wide moat stocks are one to invest in. These stocks tend to be resilient in all times whether it’s the bullish or the bearish market. Having a wide moat stock in your portfolio is the perfect way to enhance your portfolio and set yourself for wealth appreciation in the long run. Look for the wide moat stocks and start your journey. Happy Investing!!