economic moat

Economic moat is a special type of advantage for a company over others ( like it’s brand, identity, patent ) which makes it special. It allows the company to protect it’s market share and profitability.

A term which is defined and termed by Warren buffet, one of the most successful investors of all time.

Keypoints for Economic moat

  • It is a unique and distinct advantage of a company over it’s competitors which helps them hold a control over market share and profitability in this competetive enviornment.
  • Economic moat is a kind of a barrier which is impossible to mimic, duplicate or copy thus creates a company’s unique identity.

1. Sources of economic moats

If a company is able to maintain low operating expense in compared to the overall sales growth have cost advantages. They can dominate their rivalries by lowering prices.

economic moat

What is economic moat ? | Warren Buffett

Wal mart is one of the purest examples which is selling bulk of products on low rates with lesser margin which increase their volume of sales. This overall give them much higher ROE%.

2. Why companies do patent ?

Company does certain things to protect their production methods and strategies which they know. Intangible assets refers to patents, brands and licenses which helps company for being unique.

Patents are obtained when companies register their strategies and knows-hows with government to protect it’s production process and charge premium prices.

Expected sales happens when a particular market is best served by a limited number of companies, giving them a monopoly status.

3. Switching cost

This is another type of economic moat which makes it very time consuming and charge effective to shift to any other service provider.

The network effect can also fortify a company’s economic moat by making it’s product used by majority of public. Amazon and eBay are example of such effect.

Hope you got to learn everything about economic moat, stay tuned for more upcoming blogs.

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