When you invest in a stock for the long term and use fundamental analysis, you are looking for a company with a durable competitive advantage, a moat.Think about a castle real quick. We want a business that has a long, wide, durable competitive advantage (Moat) that protects a cash flow machine known as the castle (company.) We want this Moat to be tough for attackers to cross to destroy the castle. You want to invest in companies that will continue to grow for a very long time.
Source: Get Money
There are 5 Moats that I will quickly cover: 1. Brand MoatA brand moat is a company that has a product or service that you think about when you need that product or service.For example, when you search for something online, you “Google it.” Don’t tell your friends: “Hey, let me go, Yahoo that.”When you need a new phone, you say, “I need a new iPhone.”When you go to a theme park, you say, “I am going to Disney.”2. Price MoatPrice moats are very hard moats to obtain and keep. However, if you can sustain this Moat, you will do great long-term.A price moat is when a company can retain low prices that other companies cannot compete with.For example, Geico Insurance is known as one of the cheapest insurance companies because they have no middleman. Lemonade Insurance is a tech-insurance company that is working on this.Costco is a prevalent example of a company with a Price Moat. Why do you travel 30 minutes to go shopping at Costco? The prices of the products are very cheap compared to other stores.Any moron can open a business and charge a low price for a product. The catch? You want a company that charges low prices because operating costs are so cheap, which allows it to withstand low margins in competitive environments.
Source: Costco
3. Secrets MoatThe “Secrets Moat” is pretty obvious. These are companies that have patents or trade secrets.If a company has a patent on a product, it is illegal for you to compete with them.For example, if a pharmaceutical company patents a drug, it is illegal to sell that drug unless you are the company with a patent.4. Toll Bridge MoatThe most common toll bridge moat is a company with a massive long-term deal with the government. A utility company is a prevalent example of this type. PGE in California has been a disaster, but they are still around because California has no choice.We believe that algorithms are a toll bridge moat. For example, the Instagram algorithm is valuable.5. Switching MoatSwitching Moat is when switching from one company to another is too inconvenient. Some common everyday examples include your dentist and bank. A public example would be Intuit Inc., a bookkeeping software provider, because its programs are difficult to learn. Even if a Yahoo search pops up in tech, I still type “Google.com.”In conclusion, ask yourself, can some idiot with a billion dollars destroy this company? For example, if you gave me $1 billion and told me to make a better soft drink than Coca-Cola and beat their company. I wouldn’t have a prayer.
