An economic moat, often attributed to investor Warren Buffett, is a term used to describe a company's competitive advantage.[1] Like a moat protects a castle, certain advantages help protect companies from their competitors.[2]

History

As of 2012, Buffett had used the word "moat" in the Berkshire Hathaway shareholder letters more than 20 times since 1986.[3] The 2016 shareholder letter is the most recent letter to contain the word moat.[4]

Types of economic moats

Examples of some economic moats are network effect, intangible assets, cost advantage, switching costs, and efficient scale.[5]

Network effect: A network effect happens when the "value of a good or service grows" as it's used by existing and new customers.[6] An example is Amazon.[7]

Intangible assets: Brand identity, think Nike[8] or Apple; patents; and government licenses are examples of intangible assets.[9]

Cost advantage: Companies that can keep their prices low can maintain market share and discourage competition. Walmart has cost advantage.[6]

Switching costs: Customers and suppliers might be less likely to change companies or providers if the move will incur monetary costs, time delays, or extra effort.[10]

Efficient scale: Companies that have a natural monopoly - or operate in markets or industries where there are few rivals - benefit from efficient scale. Utility companies are examples.

See also

References

  1. ↑ Connolly, Gary (March 13, 2011). "Gary Connolly: Putting faith in moats risks ending up in mire". The Sunday Times. ISSN 0140-0460. Retrieved 2021-04-08.
  2. ↑ Gallant, Chris. "What Is an Economic Moat?". Investopedia. Retrieved 2021-04-08.
  3. ↑ Hough, Jack (June 19, 2012). "How to find 'wide moat' stocks". MarketWatch. Retrieved 2021-04-08.
  4. ↑ Buffett, Warren (February 25, 2017). "Berkshire Hathaway Inc. Annual Shareholder Letter 2016" (PDF). Berkshirehathaway.com. Retrieved April 8, 2021.
  5. ↑ Duffy, Maureen Nevin (May 9, 2012). "Another "Wide Moat" ETF Tests the Waters". Institutional Investor. Retrieved 2021-04-08.
  6. 1 2 Motley Fool Staff (2016-01-22). "What Is an Economic Moat?". The Motley Fool. Retrieved 2021-04-08.
  7. ↑ Romanoff, Dan (April 1, 2021). "Amazon.com Inc". Morningstar.com. Retrieved 2021-04-08.
  8. ↑ Swartz, David (March 18, 2021). "Extraordinary Challenges Led to Q3 Sales Miss for Wide-Moat Nike; Shares Expensive". Morningstar.com. Retrieved 2021-04-08.
  9. ↑ Ganti, Akhilesh (March 21, 2020). "Economic Moat Definition". Investopedia. Retrieved 2021-04-08.
  10. ↑ Grant, Mitchell (December 22, 2020). Kelly, Robert C. (ed.). "Switching Costs". Investopedia. Retrieved 2021-04-08.
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