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Hi Guys, Welcome to another ways to fatten your wallet
blog. Today we are looking at the investing concepts of a Moat. Warren Buffett describes
a moat as competitive advantage, basically trying to set the company apart from the competition.
He used a moat because it is a nice visual metaphor in terms of what used to be, I guess
in medieval times, it might be a castle, and a moat would separate the castle and protect
it from its competitors. So he thought, he looked at local companies which have huge
competitive advantages over their competitors. Some of the competitors in last years, I would
like to cover when I look at investing, when I pick stocks are the firm, 0:00:47.8 entry
or high cost entry. This can be, in some industries, there are massive costs entering, if we are
looking at lots of different industries like this oil and gas mining, pharmaceuticals,
even the high costs of setting up a kind of national restaurant chain, there is a high
cost within that. So, that is the kind of moat for existing companies, especially for
the people at the top like market leaders, etc.
Margins are massive and the reason margins are huge and usually important is kind of
a financial moat because in the cycle, the business cycle/economic cycle the companies
with the strongest margins are the ones that are likely to survive and thrive in any element
of the cycle. Even cyclical stocks, so if you are thinking of highly cyclical stocks
like constructors or house builders, things like that, maybe hotel chains, maybe even
high end restaurants, the people forego in an economic crisis or downtown in the market.
The ones with the highest margins are able to survive longer and indefinitely if they
are quite strong companies and have really high margins, whereas a company with low margins,
if inflation goes up or the price of their products or the things that they are buying
from supplies goes up, if they have got small margins and the profits get squeezed and if
something else unfortunate happens then they might not be there.. So scale is a little
on the margins, scale is when the larger the scale of the organization, the easier the
company can hire staff 0:02:46.1 will be important for most industries.
Mind share is a concept by Warren Buffett, and it goes to, it forces the idea of when
one thinks of a product or service or industry, one associates a specific product or company
or service with that. For example, he is a major share holder in Coca Cola; so I did
this with a friend today, I spoke to someone that said, what company do you think of when
I say fizzy drink and they said Coca Cola. And you can do it for a lot of very good companies
so for example kind of trainers or sneakers, what kind of company do you think of when
I say trainers or sneakers. You probably think f one or two, maybe 3 companies. I di it with
a friend and they said Nike, and that is the company I think of. Another one, what do you
think of when someone says coffee? Or coffee shop? I think of Starbucks, I think a lot
of people do. Burger chain, most people think of McDonalds in general.
So these are massive moats, 2 reasons: financial, they can spend less on advertising; if they
are in they in the general public's mind already when people think of these services. If they
want a coffee, they might be thinking, I will go to Starbucks, or if they want a fast food,
if you feel like a burger and some fries and a drink or you want to have some take out
then they might be thinking McDonalds verses a lot of businesses, especially smaller businesses
that spend significant amount of their resources over a year promoting themselves and also
explaining what they are doing. Those marketing costs can be huge and in economic down times,
these companies get affected because they need to spend. It is a cost of sale really;
they have to spend a lot of money explaining to the general public what they are doing.
Those organizations that have mind share don't need to spend.
So, you lower cost of advertising and marketing. Also, mind share can be of intangible things
like logos. For example if you go to a different country and you see the McDonalds logo, then
you are going to know what that is because of past experiences etc. That is another kind
of side of mind share. It is extremely important as a concept in terms of analyzing businesses.
If you are looking to invest in a larger business that has moats or competitive advantages,
mind share is an important concept. Market share as I am sure you know is the
share of the individual market. It might be within the product or service or general within
the industry. The larger organizations find it easier to withstand economic down times,
they also have other advantages, for example with suppliers, with employees, attracting
the right people, with getting into a new market. If they have a large market share
within one, then they have a mixture of mind share and market share, they have lots of
financial and non financial benefits to being large and having market share. But in terms
of market share, I think the biggest is with suppliers and things like that really, kind
of operational benefits. R and D: Research and development; this is
normally for, you might be thinking of R and D, but when I think of R and D in terms of
investing, I think of the companies that can expand and increase their sales throughout
many years or even decades by great R and D. Things that come to mind are companies
like 0:06:52.9 where you spend a significant amount of money on R and D and they are always
producing new products, new innovative products and generally new revenue streams, for sometimes
have been 20 - 50 years. Another one, pharmaceutical companies, I know a few that have spent a
lot of money on R and D and the ones with the best workers, team and systems in place
and budgets for good R and D produce the best products and services and go on to do better.
Innovation, similar to R and D; I kind of think R and D is more scientific, more to
do that renewing, etc. Innovation for me is more of the ideas; it is having the right
team in place and instilling it potentially with the company culture. Being innovative
means that you can create new products and services, for example, a team at Google, they
do have R and D budget, but they also have a culture of innovation. If we look at a company
like Google, they are innovating in terms of, if we think of maps, that is just one
example; they allow their team to create these new ideas, they invest in it with their team
R and D and new revenue streams. They go into everything; they have got something new they
are doing. This was recorded in May 2013 but they are looking at 0:08:21.5 view is only
big in the UK, it is now the biggest, fastest growing set box of digital TV and 0:08:28.8
are going to be providing the TV for a lot of households in the UK which is very interesting.
Products and services; so this is the actual strength of the products and services themselves.
For example, Coke is, I think 100 years product, it is an incredible product, it has long Gevity,
you don't need to change it, it stays the same, people keep buying it. That is remotely
in itself the strength of the product. And if we think of services, Google has a 91%
share of the UK share market, the UK search market. I am sure its cut is extremely high
in other countries as well. So, the strength of service of a service provider is extremely
important as well. That can be the moat that secures it for you.
Obviously, investing concepts of moats or competitive advantages is not the only thing
you are going to be looking at when you want to invest in a company. However, if a company
has all these things, I would say it is a pretty strong candidate for investing. Obviously
you will want to look at other things, but you can look at my other investing concept
videos to analyze some of the things that you might be looking at to help you make that
decision. I am active on my blog which is www.waystofattenyourwallet.blogspot.com.
I am also on Twitter, you can contact me through there, I am @Jakew99, I utilize the hash tags
#Fattenwallet and #Fatewallet. For you guys, if you use these kind of concepts, if you
use any of my investor concepts before, 0:10:18.5 then get in touch, and specifically if you
look at these kinds of things when you invest, maybe you look at margins, mind share, market
share, any of these, it will be really interesting to hear from you. Leave a comment; subscribe,
always good to get some more subscribers. It would be great to hear from you guys and
good luck with your investing. Cheers.