economic moat
{{Short description|Economic term by Warren Buffett}}
An economic moat, often attributed to investor Warren Buffett, is a term used to describe a company's competitive advantage.{{Cite news|last=Connolly|first=Gary|date=March 13, 2011|title=Gary Connolly: Putting faith in moats risks ending up in mire|language=en|work=The Sunday Times|url=https://www.thetimes.com/business-money/companies/article/gary-connolly-putting-faith-in-moats-risks-ending-up-in-mire-khrgmwdnlbm|access-date=2021-04-08|issn=0140-0460}} Like a moat protects a castle, certain advantages help protect companies from their competitors.{{Cite web|last=Gallant|first=Chris|title=What Is an Economic Moat?|url=https://www.investopedia.com/ask/answers/05/economicmoat.asp|access-date=2021-04-08|website=Investopedia|language=en}}
History
As of 2012, Buffett had used the word "moat" in the Berkshire Hathaway shareholder letters more than 20 times since 1986.{{Cite web|last=Hough|first=Jack|date=June 19, 2012|title=How to find 'wide moat' stocks|url=https://www.marketwatch.com/story/how-to-find-wide-moat-stocks-2012-06-19|access-date=2021-04-08|website=MarketWatch|language=en-US}} The 2016 shareholder letter is the most recent letter to contain the word moat.{{Cite web|last=Buffett|first=Warren|date=February 25, 2017|title=Berkshire Hathaway Inc. Annual Shareholder Letter 2016|url=https://www.berkshirehathaway.com/letters/2016ltr.pdf|access-date=April 8, 2021|website=Berkshirehathaway.com}}
Types of economic moats
Examples of some economic moats are network effect, intangible assets, cost advantage, switching costs, and efficient scale.{{Cite web|last=Duffy|first=Maureen Nevin|date=May 9, 2012|title=Another "Wide Moat" ETF Tests the Waters|url=https://www.institutionalinvestor.com/article/b14zplpg65knbr/another-wide-moat-etf-tests-the-waters|access-date=2021-04-08|website=Institutional Investor|language=en-gb}}
Network effect: A network effect happens when the "value of a good or service grows" as it's used by existing and new customers.{{Cite web|last=Motley Fool Staff|date=2016-01-22|title=What Is an Economic Moat?|url=https://www.fool.com/knowledge-center/economic-moat.aspx|access-date=2021-04-08|website=The Motley Fool|language=en}} An example is Amazon.{{Cite web|last=Romanoff|first=Dan|date=April 1, 2021|title=Amazon.com Inc|url=https://www.morningstar.com/stocks/xnas/amzn/quote|access-date=2021-04-08|website=Morningstar.com}}
Intangible assets: Brand identity, think Nike{{Cite web|last=Swartz|first=David|date=March 18, 2021|title=Extraordinary Challenges Led to Q3 Sales Miss for Wide-Moat Nike; Shares Expensive|url=https://www.morningstar.com/stocks/xnys/nke/quote|access-date=2021-04-08|website=Morningstar.com}} or Apple; patents; and government licenses are examples of intangible assets.{{Cite web|last=Ganti|first=Akhilesh|date=March 21, 2020|title=Economic Moat Definition|url=https://www.investopedia.com/terms/e/economicmoat.asp|access-date=2021-04-08|website=Investopedia|language=en}}
Cost advantage: Companies that can keep their prices low can maintain market share and discourage competition. Walmart has cost advantage.
Switching costs: Customers and suppliers might be less likely to change companies or providers if the move will incur monetary costs, time delays, or extra effort.{{Cite web|last=Grant|first=Mitchell|date=December 22, 2020|editor-last=Kelly|editor-first=Robert C.|title=Switching Costs|url=https://www.investopedia.com/terms/s/switchingcosts.asp|access-date=2021-04-08|website=Investopedia|language=en}}
Efficient scale: Companies that have a natural monopoly - or operate in markets or industries where there are few rivals - benefit from efficient scale. Utility companies are examples.