The Moat Leads to the Castle

What is moat and why should you consider it when you invest? One of my number one filtering criteria for any security is their moat. Moat is very subjective, but generally you can get broad consensus on the quality of a company’s moat.

Story time! I first discovered the concept of moat when Warren Buffet said in one of his letters to his shareholders:

You only have to do a very few things right in your life so long as you don’t do too many things wrong.

That really struck a cord with me. I do not have to focus on winning, I can win by virtue of not losing. This may seem simple, but deep down, it’s not so easy to guarantee no losses. So I thought to myself, “How can I not do too many things wrong? What makes one investment better than another?” As I began searching the web for days and speaking to various stock brokers; I fell upon the concept of moat.

As I said earlier, moat is very subjective. However, it is defined more so by the influence a company or product has over the market. For example, if I said to you right now: I will give you, at no cost to you, a One Plus Six Phone or iPhone XS Max; which would you choose? My guess is that you would choose the iPhone XS Max; this is an example of moat. Even though the One Plus Six is a far superior phone at a much lower price point; very few would accept it on those merits alone. Apple, and the iPhone, have a wide market moat which commands respect and pricing power, even in the worst recessions.

Companies with wide moats are all around you; Coca Cola, Pepsi, Disney, Johnson and Johnson; the list is very long. So start taking moat into consideration when you invest in anything. How good is the reputation? How willing would consumers be to buy their products at even the worst of times? How willing are consumers to buy their products at the best of times?

Having an understanding of moat will help you protect your downside risk. Moat can determine how well a company can stay afloat despite depressed demand or reluctance to spend. Remember, protecting your downside should be your number one priority. The upside will flow naturally in bull markets so you must be defensive and ready for bear markets, which all technical data is pointing to another large bear market on the horizon; similar to 2008. More on that later, but for now; start taking steps to protect yourself through the knowledge of the moat.

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