A Moat

Investment Analysis Clubs Saul’s Investing Discussions
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Coming from a career in a non-stock background, as most of us , many of the terms used are sometimes … Greek to me.

On this board as well as others, the word moat is used a fair amount in stock analysis. The MF has a database and Saul in FAQ area covers many terms.
However, I have not found a definition of a “moat”. So please forgive me if this has been addressed on this board and elsewhere.

For those of us who have a difficultly searching, looking, and blindly blundering through life (such as I), then here is a simple definition.

“A moat is a deep, broad ditch, either dry or filled with water, which surrounds a castle, fortification, building or town, historically to provide it with a preliminary line of defense.”

We all can picture this from our past where the bad guys are trying to cross the plain with arrows and fire balls flying all around. Then they cross the water in front of the castle, hot oil and …… well you know the rest.

So what was this marauding herd’s quest to endure such anguish?

a) A maiden that is distressed
b) The kings head
c) Gold and plunder
d) The castle and township
e) A cellar with lots of beer and wine
f) All of the above

Well, I would pick in most cases e, however here the answer is probably f.

So what’s that got to do with a stock?

When investors talk about a “wide moat” company, they mean one able to defend its profits from marauding competitors.

The internet lists several items that can make up a stock moat:

  1. companies being the lowest-cost player in an industry
  2. Patents , licenses and intellectual property(ex: drug companies)
  3. or the risk and expense customers would face in defecting to a rival company (early Microsoft)
  4. Having a well known brand
  5. Owning a large share of the market
  6. Huge startup costs to get into the business

I am sure there are other components’ that are a part of the “wide moat” to the castle.

Please add as we are all learning as we go.

Now I know why a “wide moat” is mentioned so often on the boards. It is another very important factor to consider when evaluating a stock to purchase.

This is a simple explanation and I hope it helps those of us trying to learn the proper concepts of investing .

Mark

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Hey Mark:

Re Moat…

I have always liked Michael Porters definition as regards the FIVE FORCES:

http://www.quickmba.com/strategy/porter.shtml

If you find companies that show strength in these 5 forces, you likely have found one with competitive advantage…ie moat.

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Mark, you have clearly done a good job of self-discovery here. The one thing that I would add off the top of my head is that the point of a moat is to present something which is difficult for a competitor to breach. Often, we have had small companies create new markets which, once proven as markets, big established companies have then entered and dominated, shutting out the little company who proved the existence of the market. A moat is a way of keeping that from happening. The best, of course, is a patent moat where the upstart owns technology the big guy doesn’t have access to, allowing the little guy to remain in control. First mover can also be powerful, if the big guys are slow on the uptake so that one has established oneself as a market leader before they get moving. There are many, many flavors.

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If you go to the tab " how to invest" you can search for “moat” (or other terms people use that you are unsure of)

http://wiki.fool.com/Moat I have done it for you here.

I highly recommend The Little Book That Builds Wealth which has extensive discussion of moat and how they differ from brands. Network effect is a very strong moat…
http://www.amazon.com/Little-Book-That-Builds-Wealth/dp/0470…

I hope this helps.

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