What Makes a Stock Great for Investing? Pt. 1: A Wide Moat

This post is part of the What Makes a Stock Great for Investing? series.
Be sure to check out Part 2: Sales Over Expenses and Part 3: Dividends

 

The term "wide moat" was made popular by Warren Buffett and refers to the competitive advantage that one company has over other companies in the same industry.

Think of how a castle has a moat around it. It takes a lot for an enemy to get over a wide moat to attack the castle. A company's competitive advantage works the same way.

In this video, I talk about why a wide moat makes a stock great for investing and how companies create a moat around themselves.


Video Transcript
What Makes a Stock Great for Investing?
A Wide Moat 

 

What is a moat?

The term "wide moat" was made popular by Warren Buffett and refers to the competitive advantage that one company has over other companies in the same industry.

Think of how a castle has a moat around it. It takes a lot for an enemy to get over a wide moat to attack the castle.

A company's competitive advantage works the same way. Companies with a wide moat have an such an advantage that it would take a lot for another company to catch up and get to the forefront of the industry leaving little to no concern that another company will come along and take over as leader of that particular industry. 

 

What creates a wide moat?

A company's moat can be any characteristic or feature that makes their product or customer service experience better than other companies in the same industry.
 

Some features or characteristics used to create a wide moat:

  • product or service (different or higher quality)
  • store design or layout
  • marketing channels
  • their brand logo or image
  • commercials
  • technology
  • supply channels (makes their product cheaper to make or higher quality)
  • customer loyalty

 

A wide moat is one of the characteristics you want to look for in a stock for long-term investing.

 

Companies with a moat.

Coca-Cola (KO)     In some parts of the country, coke has become the name for soft drinks even though the person may not necessarily want a Coca-Cola. Since Coca-Cola has positioned themselves to be the leader of soft drinks, this is the name most people know and recognize.
 

Tiffany (TIF)    When people think of expensive jewelry Tiffany is one of the first companies that comes to mind. Tiffany has become known for its signature blue and having a line of jewelry that is considered high quality. The perceived "status" from owning a piece of jewelry from Tiffany is the moat they have created around themselves.


WD-40 (WDFC)    WD-40 has really made a brand around squeaky door hinges! When my door is squeaking or a screw is stuck, the first product I think of is WD-40! They also make other products but the one they've really become known for is it's WD-40 product. It's the first product many think of when searching for a solution to a squeaky hinge or rusted screw.

 

When you’re looking at whether a stock is good for long term investing, take a look at how have they set themselves apart form other companies in their industry. Creating a wide moat helps them not only maintain their market share and stay in the forefront of the industry but also be the one that brings in the most profits. When you’re an investor, that’s what you care about. Are they making money? Because if they’re not making money, they’re not making you money. 



Stocks, Links and Resources Mentioned

Coca-Cola (KO)
Tiffany (TIF)
WD-40 (WDFC)

 

Join the Conversation

Can you think of a company that has a wide moat or competitive advantage in its industry? Tell me in the comments! 


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