Thread by @caprichinvest

A thread on competitive advantage and moats

We’ve heard of moats which is metaphorically a term used by warren Buffett. So what’s a moat in business sense ?

Put simply moats are competitive advantage that keep competitors at bay from encroaching a companies territory.

What are the sources of competitive advantage ? Old age companies like standard oil and reliance had a scale advantage, where they were able to produce at scale which in turn helped them reduce costs and get a good price from their suppliers.

Do scale advantages still persist ?

1. Scale advantages is the first source of MOAT. If a company can scale its production or service it has a huge advantage over its peers

Ex : Take Netflix, the scale advantage comes from its leverage used via internet which is absent in other forms. With scaling its had an edge

2. Patents - Another source of moat is the patents. Economically it keeps away competitors from using your creation and copying them.

Ex - Apple has patents which has kept a few competitors from copying its design.

Pharmaceutical companies have an edge where they patent drugs.

3. High entry barriers / Government regulations

In a high entry barrier space like cigarettes, alcohol and mining where the government doesn’t easily give permission for new competitors to enter that can be a source of great advantage. These sectors comes with problems too.

4. Switching cost - High switching cost. I’ve been drinking Coco cola from my teens and have no wish to change to another drink whatever be it. That’s a source of great advantage to a company where the switching cost keeps consumers

This can also be a brand loyalty - HDFC Bank

5. Mind share - Warren Buffett says leave alone the market share but when children see Disney they are going to go inside, what kind of value can we attach to a Mind share like that ?

That’s exactly true. I still don’t think of any other brand except Gillette when in shave.

6. Low cost producer - In any field the lowest cost producer has a tremendous advantage over the other. The field maybe competitive, but the edge is the one who produces at the lowest cost.

The lowest cost producer of cement or any service can also sell lower by a wide margin.

7. Technology / Coding - These are modern Moats and difficult to assess because of the “Darwinian” nature of change in such areas of business.

Google and Microsoft has a technology advantage which makes them highly impregnable.

8. Monopoly and duopoly - These kind of Moats in modern businesses are based on technology.

At current culture when a monopoly is metamorphosing its being noticed and competitors move in. These moats are difficult to assess.

These moats can be in any permutation or combination, example Google has a Scale advantage and a monopolistic nature.

Once scale is achieved than lowest cost of production is possible, which then makes them a LOLLAPALOOZA effect that munger says.

Once an investor has identified such Moats all we have to do is stay invested and focus on the price we pay for the business. Which is very important.

Watch out for companies with Competitive moats !

#Caprichinvestments #moats #StockMarket #investing