What Warren Buffet said...
Have you ever heard of the word moat? Back in medieval times, castles had moats that surrounded them. These moats were gutter-like structures that were mostly filled with water or left dry. This was a defence strategy employed by the royals. Last week, we saw an animal juxtaposed to a phenomenon in the tech industry, this week we would see how Warren Buffet took a random medieval structure and linked it to situations in the economy.
An economic moat is a company’s competitive advantage over its rivals due to certain privileges it has been able to develop or acquire over a period of time say lower cost of capital, or brand recognition. These privileges or characteristics that the firm continues to build are what deepen the firm’s moat and prevent competitors from crossing over to touch their market share. An economic moat would be the defence strategy of a firm against any possible form of attack from competitors. This defence strategy is what Warren Buffet used to describe a company’s competitive strategy.
What is competitive strategy? According to Wikipedia, it is defined as the attributes a company possesses that make it outperform its rivals or its competitors (hence the name). The main aim of the moat during medieval times was to protect the castle, its inhabitants, and their precious goods. Therefore, we can say the economic moat is created by firms to protect their long-term profits and market share.
Let us look at some examples of economic moat.
Intangible assets such a branding, patents, and trademarks. Patents are exclusive rights for an invention, idea, or innovation. They give the owner the sole right to create products or services and maintain total ownership of that product or service’s market share. Let’s say “Company A” discovers a new drug and registers it as a patent. For the duration of that patent (25 years), “company A” has total ownership of the market share of that drug and is able to harness it for long-term profit and customer retention through customer loyalty. “Company A” has been able to fortify its castle (market share) from its rivals when they enter the market.
Branding is creating a strong and positive perception of a company by its customers. A good example for this would be Apple. The company has successfully created a positive perception of itself that regardless of the new entries into the cellphone industry, its market share remains untouched and its demand continues to increase (regardless of the very high price of its products). So that brand is Apple’s defense strategy. Trademarks are recognizable symbols or expressions that are unique to a product or service.
To Learn
Warren Buffet mentioned the term "“economic moat” while discussing his investing strategy in firms. He stated that the key to investing in businesses was not assessing how much that industry would grow or affect society but identifying the competitive advantage of the firm and the durability of such advantage. A firm’s profit level is important but what is more important is the strategy it has to sustain and protect the profit level. This is because what sustains a business is what it does to protect and increase its market share.