Economic Moat and How to Find and Invest in Stocks With Wide Moats?

What are MOATs?

During construction, holes are dug all around the castle, which is filled with water later on. An ancient moat surrounded castles as a form of protection. More protection is conferred on a castle with a wider and deeper moat. It is more difficult for attackers to get into the castle with such an arrangement.

Comparing stocks (companies) to stocks, what is the analogy?

A competitive advantage is also known as an economic moat. In addition to its economic moat, the company has a competitive advantage over its competitors.

What are the benefits?

Competitive companies don’t pose a threat to the company’s market share, profit, etc.

How does a company gain a competitive advantage (economic moat)?

There are a number of factors to consider. Among the more apparent ones, and also logical, are those listed below:

  • It depends on the customer’s preferences.
  • There is a market limit.

In economics, a “moat” is the ability of an organization to hold a long-term competitive advantage that separates them from its competitors. Medieval castles had moats surrounding them to protect their valuables from invasion. It is important that a company have a strong moat in order to gain a sustainable competitive advantage.

Consumer preferences: Moats are built primarily on consumer preferences. It does not matter how much the competitors try to convince a customer that a particular product is good, the customer will still purchase their preferred item. “Patanjali,” for instance. These brands have recently made giants like P&G and HUL look small. How do consumers get so convinced about a brand?

Several reasons may explain this, but I believe that the most logical reasons are these-

  • It is an interesting & useful product.
  • The price is reasonable.
  • It is on-trend.
  • It is of good quality.
  • It does not have alternatives (in terms of R&D, patents, etc.).

Limitations within the market: Market constraints can also create a competitive advantage for a company. The 80s were the era of Hindustan Motors (HM), Maruti & Fiat. These were the only cars available to 90% of Indians in those days. Several giants like Ford, VW, and Toyota were unable to enter the Indian market as a result of the closed Indian economy. HM and Maruti gained their economic moat due to restrictions in the Indian economy.

The construction of economic moats requires time. In order for any company to attain a moat, it will probably take decades.
In order to create a moat, you must influence your customers’ preferences. Only great companies can accomplish that.

Economic Moat and Customer Preference

A few names of companies whose products we love are listed below. Regardless of their current circumstances, we will continue buying their products. Why?

As there are no comparable products available on the market that are comparable to them.

  • Nestle India’s Maggie, Nescafe.
  • The Britannia Biscuit.
  • Dabur’s Chanwanprash.
  • Asia Paints and Berger Paints.
  • Domino’s Pizza – Jubilant Foodworks.

Many of their products have evolved from being “merely products” to being a “necessity” for their clients. What is the reason for this?

It is the company’s responsibility to receive this credit.

This has led to a preference among customers for their brand and product as a result of their investment in the following.

  • R&D (development of new products).
  • Merchandising.
  • Distributing and selling.

What is the best way to identify stocks with wide moats?

The moat raises a few very basic questions.

A company with a wide moat benefits economically. What does it gain from it?

  • TA large portion of the market belongs to them.
  • This allows them to operate at high-profit levels.
  • With time, it is even possible for them to become even more profitable.

In order to measure profitability, which is the best method?

  • Return on Capital Employed (ROCE) is a financial ratio.
  • Stocks with a wide moat can be identified by high ROCE, ROCE growth, and market capitalization.

ROCE: An introduction

The same type of product is made by two companies ABC and XYZ. These companies have the following financials:

 ABC

100 rupees is the cost of doing business

10 rupees profit.

XYZ

One hundred rupees are the costs of doing business

12 rupees profit.

In the above numbers, what is being shown?

Each time 100 rupees is invested, ABC generates ten rupees and XYZ generates twelve.

What is the most profitable company?

 XYZ.

An example of Return on Capital Employed (ROCE) is given here.

What are the best ways to buy stocks with a wide MOAT?

A moat stock trades at overpriced levels just like blue-chip stocks. Thus, it is vital to take caution when purchasing these stocks.

What is the logic behind this?

It does not matter how good the stock is (blue chip or wide moat), if the price isn’t right, the returns will be low (or even negative).

What is the best way to buy moat stocks?

  • Using the screening criteria above, prepare a list of moat stocks.
  • Track the performance of the selected stocks.
  • When the price falls below its fair value, purchase the stock.

How do you calculate the stock’s fair price?

 A stock analysis tool can be used to determine this.

 Bottom Line:

Map finders will pay more attention to the following financial statements:

  • Growth in sales.
  • A rise in profits.
  • Return on investment (return on operations, R&D, marketing, sales, and distribution).
  • Improvement of profitability (ROE, RoCE).

Observing the overall market, in general, is also essential, in addition to the financial reports.

Discover brands that have become more popular because of their quality products and services, combined with marketing.

  • Using the screening criteria above, prepare a list of moat stocks.
  • Track the performance of the selected stocks.
  • When the price falls below its fair value, purchase the stock.

How do you calculate the stock’s fair price?

 A stock analysis tool can be used to determine this.

 Bottom Line:

Map finders will pay more attention to the following financial statements:

  • Growth in sales.
  • A rise in profits.
  • Return on investment (return on operations, R&D, marketing, sales, and distribution).
  • Improvement of profitability (ROE, RoCE).

Observing the overall market, in general, is also essential, in addition to the financial reports.

Discover brands that have become more popular because of their quality products and services, combined with marketing.

Disclaimer-

The contents of this article are for educational purposes only. All forms of investing involve risk. Investing is solely your responsibility, regardless of whether it is possible to minimize risk. Make sure you do your own research. With no guarantee of profits or losses on investments, we shared our insights to educate traders and investors. To learn about and analyze your stocks, you can do so on your own or consult with your financial advisor.  

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