Stocks are discussed, analyzed, and promoted on networks like CNBC and Fox Business every week day. Despite the fact that these investments are constantly talked about, they still do not teach the basic principles of investing. Financial networks cater more to professional investors and traders who already understand the markets. So, today I will break down the key components that a savvy investors should look for when investing. This is the first entry in a ten part series, which will list the 10 characteristics to look for when buying a stock. These characteristics have come from studying the world’s greatest investor, Warren Buffett who invests in companies with these 10 distinct characteristics. Today, we will take a look at the first characteristic.
1. Invest In Companies That Have Wide Economic Moats
A moat is a deep wide ditch that surrounds a castle. A moat serves as protection and is great for defense from those seeking to attack. Companies with wide economic moats have a major competitive advantage, which creates huge barriers to entries for new entrants and provides them with protection from upstarts for years. A wide economic moat can help your investing portfolio survive market crashes and severe economic downturns. Industries such as energy, finance, and utilities are far more likely to have companies with economic moats than technological firms in which new upstarts and startups can emerge as major competitive threats in a year or less. (Think Google toppling Yahoo and Netflix destroying Blockbuster). Buying companies with wide economic moats can protect your hard earned capital from evaporating overnight by the emergence of a new competitor.
Examples Of An Economic Moat
Having a brand name that is instantly recognizable can be a major competitive advantage. Brand names like Coca Cola and Pepsi distinguish these two software giants from competitors. The swoosh Nike and it’s decades long history of producing quality athletic apparel and celebrity endorsements (Michael Jordan, LeBron James, Odell Beckham) give the company a leg up on new companies entering the sports apparel industry. Large commercial banks in the banking industry such as Bank of America, Wells Fargo, Citigroup, and JPMorgan Chase engage in an industry with such substantial capital requirements and tremendous regulatory hurdles that it is hard for new banks to rise to their large cap levels. Visa, MasterCard, and American Express dominate the credit card financial transactions industry and have gained acceptance at retailers globally. A recipe such as YUM Brands KFC’s chicken recipe customer popularity, consumer loyalty, and patents can also serve as economic moats.
It is important to note that no company has an impenetrable economic moat. Any moat can be eradicated overtime but a wide economic moat can provide defense for years. The value of economic moats lies in Warren Buffett’s number one investing rule: Never Lose Money. A wide economic moat is the first step to protecting your hard earned cash whenever buying a stock.