The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. One of the keys to finding superior long-term investments
is buying companies that will be able to stay one step ahead of their competitors, and it’s this characteristic..think of it as the strength and sustainability of a firm’s competitive advantage.
Importance of sustainable economic moat has been extensively covered by me in old article (Link attached)
Link: Importance of sustainable economic moat
But there are also moats which are mistaken/eroding and investors may lose their hard earned money investing in such companies….Beware of them..
Mistaken moats or disguised moats:
Great Products –Can create fantastic short term results. Eg. Fords EcoSport. Great car but this will be replaced soon by other similar offerings in the market. Compare this with PATENTED engine components from BOSCH.
Strong Market Share
Pure market share is not a moat. How a company got to being a market leader is more important to understand than just where it stands in market share.
A strong market share is just a competitive advantage.
Great Execution –It is a great strategy to have a fine execution strategy, but that in itself is not a moat, it is at most a competitive advantage that is not sustainable, unless its is based on a proprietary process that is bug free and cannot be easily copied. e.g. there have been many instances where the Big McD has suffered bad execution despite standardized practices.
Smart people at the HELM are not sustainable. Sooner or later an idiot may be brought in to run the business.Even more important in the Indian scenario as most businesses are family owned and family run.
Technology replacement by a competitor is a fact of life for most technology companies. Technology disruptions are unexpected & severe.
Disruptive technologies can hurt the moats of businesses that are enabled by technology even more than business that sell technology.
Shift in structure of industries:
Even shifts in the structure of industries like consolidation can erode strong moats.
Entry of irrational competitor:
Investors should look out for the entry of irrational competitor into an industry. (Remember what happened in Indian telecom sector after entry of reliance 🙂 )