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:
- companies being the lowest-cost player in an industry
- Patents , licenses and intellectual property(ex: drug companies)
- or the risk and expense customers would face in defecting to a rival company (early Microsoft)
- Having a well known brand
- Owning a large share of the market
- 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 .