Finance:Economic moat
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
- ↑ Connolly, Gary (March 13, 2011). "Gary Connolly: Putting faith in moats risks ending up in mire" (in en). The Sunday Times. ISSN 0140-0460. https://www.thetimes.co.uk/article/gary-connolly-putting-faith-in-moats-risks-ending-up-in-mire-khrgmwdnlbm.
- ↑ Gallant, Chris. "What Is an Economic Moat?" (in en). https://www.investopedia.com/ask/answers/05/economicmoat.asp.
- ↑ Hough, Jack (June 19, 2012). "How to find 'wide moat' stocks" (in en-US). https://www.marketwatch.com/story/how-to-find-wide-moat-stocks-2012-06-19.
- ↑ Buffett, Warren (February 25, 2017). "Berkshire Hathaway Inc. Annual Shareholder Letter 2016". https://www.berkshirehathaway.com/letters/2016ltr.pdf.
- ↑ Duffy, Maureen Nevin (May 9, 2012). "Another "Wide Moat" ETF Tests the Waters" (in en-gb). https://www.institutionalinvestor.com/article/b14zplpg65knbr/another-wide-moat-etf-tests-the-waters.
- ↑ 6.0 6.1 Motley Fool Staff (2016-01-22). "What Is an Economic Moat?" (in en). https://www.fool.com/knowledge-center/economic-moat.aspx.
- ↑ Romanoff, Dan (April 1, 2021). "Amazon.com Inc". https://www.morningstar.com/stocks/xnas/amzn/quote.
- ↑ Swartz, David (March 18, 2021). "Extraordinary Challenges Led to Q3 Sales Miss for Wide-Moat Nike; Shares Expensive". https://www.morningstar.com/stocks/xnys/nke/quote.
- ↑ Ganti, Akhilesh (March 21, 2020). "Economic Moat Definition" (in en). https://www.investopedia.com/terms/e/economicmoat.asp.
- ↑ Grant, Mitchell (December 22, 2020). "Switching Costs". in Kelly, Robert C. (in en). https://www.investopedia.com/terms/s/switchingcosts.asp.
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