Wide Moats Defined By Top Value InvestorsVW Staff
wide moats defined
Warren Buffett has argued repeatedly and persuasively for the importance of moats in investing. Many of Buffett‘s successes have come from companies with wide moats, affording those firms sustainable competitive advantage. Here are insights into the use of moats in investing, provided by selected members of The Manual of Ideas . Below is a brief excerpt from JEFFREY STACEY, FOUNDING PARTNER, STACEY MUIRHEAD CAPITAL MGMT followed by the two pdf links
JEFFREY STACEY, FOUNDING PARTNER, STACEY MUIRHEAD CAPITAL MGMT
Most investors intuitively understand the concept of investing in companies with enduring competitive advantages or what is referred to as a wide moat. But while the concept is simple, it is not easy to do. Judging whether a moat exists and the sustainability of that moat is difficult.
Even Warren Buffett, who is clearly the greatest wide-moat investor of all time, misjudged the sustainability of the moat around newspapers when the Internet emerged as a disrupting force.
As I search and sift and study companies in an attempt to assess the size and durability of the moat a business may possess, I try to keep things as simple as possible. Does the business show a high return on shareholders’ equity over a long period of time? Does it have a pristine balance sheet? If a business generates high returns through leverage and financial engineering, it probably doesn’t possess an enduring moat. Does the business have pricing power or
brand presence or the lowest-cost production? Does it have high margins and a track record of consistent free cash flow generation?
These are all pretty basic things and are easy to assess. While it won’t necessarily result in an investable moat, insisting on the basics will lead you to high-quality companies, which should result in an ample margin of safety if you don’t pay too much.