Moat companies

Highly profitable companies are sure candidate for investments. One has to deploy the resources where the return on investment is maximum. But highly profitable companies soon attract competition from other companies in capitalism, resulting in profit erosion over the years. Buffet said ,“if you've got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it." For a company that needs to protect it’s business (market share) and it’s profits from its competitors and grow, it needs a Moat. Pat Dorsey says moat for a company can be achieved in one of the following factors 1.Product differentiation – Company comes up with top notch products/services 2.Low cost production – Company has found a way to produce goods and services at low cost which competitor cannot copy easily. It may be due to Network effects. 3.Customer Locking - In the business its difficult to switch vendor as a lot of transition cost involved. 4.Monopoly that prevents competition for some period – With use of patents , Govt license etc 5.Brand Companies are classified into narrow Moats and wide moats depending on the duration it can maintain the Moat factor. If the Moat factor seems to remain only for few years it is classified as a Narrow Moat , or if it seems to be present for many years its classified as Wide Moat. Some IT companies are classified as Narrow Moat in Morningstar Moats Is it enough if we identify a company with a Moat for successful investing? We need to buy them when its offered at a reasonable valuation. As per Buffet , as long as we don’t make many mistakes in our life, if we have a few good ideas in stock markets, it would be enough to be successful. He says, in your life you are given a card with 20 punches. You take max 20 correct decisions. Many view markets differently. Some say markets are efficient and its trend is random. Some say , whole market is predictable; but individual stock movement is random. Some look for value. Some argue for growth. Some ask not to time the market. Some say trend is your friend. And all have got their reasons to back their arguments. That makes markets very interesting thing to analyse. Moat investing is one of the important concepts to remember when we invest in growth companies.

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