Investing Lessons [Basic]

What is moat in Warren Buffett’s terms & why it’s important

Chris From RWOA.io, Re-ThinkWealth Content Expert

27 December 2017

Who is Warren Buffett?

Warren Buffett is my favorite investor. He also happens to be one of the most, if not the most successful investor of all time.

His name is usually linked with Berkshire Hathaway, a company he founded in the early 1960s. And is currently one of the world’s largest conglomerate.

Berkshire Hathaway invests in many companies such as GEICO, the insurance company, and Dairy Queen. They are also the largest shareholder for Wells Fargo & Co, Coca-Cola, International Business Machines and American Express.

Warren Buffett is currently worth US$83.3 Billion as of 4 December 2017.

What is Moat?

Moat is a term that Warren Buffett uses to illustrate the competitive advantage of a company.

Its definition in the dictionary is that it is “a deep, wide ditch surrounding a castle, fort, or town, typically filled with water and intended as a defense against attack”.

So the castle, fort or town is meant to illustrate a company. To prevent them from being easily attacked, they need to have a moat around it.

That moat is simply put, the competitive advantage of the company.

Why Is Moat Important?

Moat is important because it protects a company from losing their market share easily which will erode its earnings power over time. This is important for us as investors because we would want the company we invest in to have its earnings grow over time – then the share price will follow – and not the other way round.

So, we should only invest in companies with a strong moat – if our aim is to hold it for a long period of time.

Warren Buffett said a few things about moat before which we can learn something about:

“The moat in a business like our auto insurance business at GEICO is low cost. I mean people have to buy auto insurance so everybody’s going to have one auto insurance policy per car, basically, or per driver. And I can’t sell them 20, but they have to buy one. What are they going to buy it on? They’re going to buy it based on service and cost. Most people will assume the service is fairly identical among companies, or close enough, so they’re going to do it on cost, so I gotta be the low-cost producer. That’s my moat.”

Disclaimer: The information provided is for general information purposes only and is not intended to be a personalized investment or financial advice.

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