Do you know how to pick companies with an economic advantage that will beat the market for the long run?
How do you locate those companies, and how to invest in them?
Do you know what MOAT is?
MOAT is a canal that designed to protect the castle, a palace, or a small town.
An economic moat is a term coined by the legendary investor, Warren Buffett, and he refers to a certain competitive advantage the company has in relation to other companies in the same sector.
An Economic moat for a company is what allows her to effectively maintain high profitability for a long time.
The investment firm and ETFs, Morningstar has perfected the term coined by Buffett and developed a whole strategy around it.
On the basis of the strategy is the assumption that as the economic moat of a company is larger, so does its competitive advantage is stronger and is lasting longer.
In fact, Morningstar concluded that when a company has a wider economic moat (which includes a number of features which we’ll address below), she can get through crises better and generate an excess return to investors over time.
Do you want to create a “Canal” that will protect your capital?
These are 4 different types of moats companies
Patent – The most common type of economic moat is patent. If for example, the company has an existing product patent it, so it enjoys a competitive advantage and can generate higher profits over time, until the validity of the patent expires.
High Switching Costs – Another type of economic moat is higher costs to customers to switch over from one product to another.
Types of switching costs include exit fees, search costs, learning costs, cognitive effort, emotional costs, equipment costs, installation and start-up costs, financial risk, psychological risk, and social risk.
Brand Strength – As the company has a stronger brand, its customers are willing to pay a lot to get it, so its economic moat is deeper. An example of such companies are Nike or Apple, their customers are willing to pay a hundred percent to win their original products.
Economies of scale – The reduction in long-run average and marginal costs arising from an increase in size of an operating unit (a factory or plant, for example). A company can reduce its costs over time and consequently lower the prices of its products for consumers, winning distinct competitive advantage compared to its competitors.
How to Invest in a Company With an Economic MOAT?
So how can you invest through the strategy of the economic moat?
Of course, you can try and find companies with wide economic moat by yourself, and invest in them.But there is a simpler way by funds and ETFs already tracking companies with
But there is another way by funds and ETFs already tracking companies with based economic moat.
You can invest in ETFs.
For example “VanEck Vectors Morningstar Wide Moat ETF” that tracks the index “Morningstar Wide Moat”.
The bottom line for value investors who are trying to seek for established and stable companies with a distinct competitive edge, the investment strategy of the economic moat can be very effective.
If you wish to use this strategy to actively (not through passive investment products such as certificates or basket funds) and to build a portfolio based on this strategy, it is important to look for companies with the widest economic moat as possible, that meets with the characteristics mentioned in the article.