Business, Legal & Accounting Glossary
Condition which enables a company to operate in a more efficient or otherwise higher-quality manner than the companies it competes with, and which results in benefits accruing to that company.
A competitive edge that enhances a company’s appeal as an investment.
Have you ever wondered what Warren Buffett means when he says that he looks for businesses with wide economic moats? While it’s fun to imagine a company in a castle surrounded by alligator-invested waters, what Buffett actually means is that he looks for businesses that have strong competitive advantages. There are many different types.
Competitive advantages are frequently cited by ultra-long-term investors such as David Gardner, who look for stocks they can hold for a decade or more. The greater a company’s competitive edge, the more likely it is to keep cranking out those cash flows.
That said, several factors can threaten a company’s moat — maybe the business is a leader in a collapsing industry (printed newspapers, anyone?), or perhaps a new company has come along with better ideas, faster execution, disruptive technology, and even lower prices. Even a wildly popular brand could suddenly fall out of fashion (poor Crocs). But whatever the reason, moats don’t necessarily last forever. They’re a very attractive quality in a business, but like everything else, they need to be monitored.
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This glossary post was last updated: 21st November, 2021 | 0 Views.