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What are moats What do you mean by moat in a business context?
An economic moat is a distinct advantage a company has over its competitors which allows it to protect its market share and profitability. It is often an advantage that is difficult to mimic or duplicate (brand identity, patents) and thus creates an effective barrier against competition from other firms.
Is it better to have a wide or narrow moat?
A competitive advantage, or a narrow economic moat, refers to any advantage that currently enables a company to earn stronger margins relative to its competitors. A wide economic moat, on the other hand, offers a sustainable competitive advantage over the long haul.
How do I find a company’s economic moat?
Margins (gross, operating, and net profit margins) are also something you should look at to determine whether or not your company is maintaining a strong economic moat. Ideally, you’d want stable or growing margins over the last 10 years.
How do I build a moat for my business?
Companies can build moats by strengthening their brands, achieving economies of scale, or even lobbying for special status from the government. In return, they can receive customer loyalty, pricing power, and legal protections that make it difficult for other companies to compete with them.
What does size of moat mean?
Moat Size. The measure of the competitive barrier, if any, that gives a company an advantage over its rivals and allows it to generate above-average returns on invested capital.
How do you build an economic moat?
Creating an Economic Moat
- Cost Advantage. As discussed in the lemonade stand example, a cost advantage that competitors cannot replicate can be a very effective economic moat.
- Size Advantage. Being big can sometimes, in itself, create an economic moat for a company.
- High Switching Costs.
- Soft Moats.
How do moats work?
The purpose of a moat was primarily to protect the castle from attack. As a defense mechanism, moats were very effective. Although they’re usually depicted as wide, deep bodies of water, moats were often simply dry ditches. Dams could be built that would control the level of water in the moat.
How do you build economic moats?
A clear way to build economic moats around a business is to have a differentiator that is impossible to replicate, either due to legal means, or factors that aren’t fungible. Intangible assets constitute patents and trademarks, but also hard-earned competitive advantages, such as brand names and culture.
How do you know if a company has an economic moat?
Although economic moats tend to be more qualitative than quantitative in nature, there are a number of ways you can recognize when a company has one or more moats in place. A significant amount of cash flow, and a strong operating performance are common to all businesses with an effective economic moat.
What are some easy ways to find moats in stocks?
There are no “easy ways” to find moats but there are some ways to give you a guide. Finding a company with a strong competitive advantage like an Apple (NASDAQ: AAPL) is what every investor is looking for. It is not easy and there are not a lot of formulas that you can use to find them.
What is a wide moat?
The term “wide moat” was made popular by Warren Buffett and refers to the competitive advantage that one company has over other companies in the same industry. Think of how a castle has a moat around it. It takes a lot for an enemy to get over a wide moat to attack the castle. A company’s competitive advantage works the same way.
What is a moat and why is it important?
What we referred to as a moat is what other people might call competitive advantage. It’s something that differentiates a company from its nearest competitors, in very simple words: an economic moat is basically anything that gives a business some form of built in protection for its ongoing generation of cash flow.
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