This is the most important part of the whole process – if you pick a company without a moat then you’re setting yourself up for trouble. So what is a moat? A moat is an analogy that a famous investor (Warren Buffet) used to symbolise protection from competition – the moat of a castle protects it from intruders. The fancy term for moat is ‘sustainable competitive advantage’ – what does your company possess that means it will be protected from competition forever. Why is this important? Because if you don’t have protection from competition, then at some point in the future your company will be made obsolete by a competitor. You won’t know when it happens, and you won’t know where it comes from – but the ending result is that your company will suffer, and its stock will decline with it.
So while its pretty crucial to get this part right – don’t stress, it’s really not that hard to identify these, especially if you use the product/service of the company you’re looking at.
There are five types of moat (sustainable competitive advantage):