The Power of Moats

I was going through my file cabinet, and uncovered an interesting presentation from Morningstart on the Power of Economic Moats. An economic moat is a competitive advantage that allows a company to generate high returns for long periods of time. There are several sources of competitive advantage, which we would cover below.

Having an economic moat allows a business to generate high rates of return on investment over a long period of time. That allows for faster earnings growth, more predictable cashflows and generating excess cashflows too. Businesses with high moats have generated high returns on investment for long periods of time. Duration is very important.

I like the idea of looking at stocks as small pieces of a business, rather than pieces of paper to be traded.

I also like the idea of performing fundamental research, assessing competitive advantages, taking long-term perspective and investing when valuation is right, and odds are in your favor as an investor.

There are five source of sustainable competitive advantage.

- Intangible Assets

- Switching Costs

- Network Effect

- Cost Advantage

- Efficient Scale