Economic Moats: Investing for Beginners

What is an Economic Moat

In old times, deep, broad channels were dug surrounding a castle, fort, building, or a town, which were usually dry or filled with water. These channels or trenches, called moats, were used as preliminary line of defence from enemies.

 

 Investing for Beginners

 

Economic moats of a company are comparable to the old days moats as they keep the company at an advantageous position than its competitors for a long time. The concept of economic moats was popularized by Warren Buffett.

Economic moats of a company are the unique competitive advantages which keep the company ahead from its competitors for a long duration of time.

One of the reasons of successes of the companies like Google and Coca Cola in the United States of America and Maruti Suzuki and HDFC Bank in India can be attributed to economic moats.

In the case of Google, one of the unique competitive advantages was that it provided more relevant search results than its competitors. It also did not take money from websites to give them a better position in the results page. This helped Google to maintain trust among its users. Its search algorithm was patented and no known search engine companies are able to match or come even close to its level till today.

In Coca Cola, the secret ingredient which gives Coca Cola its unique taste and flavor is the economic moat which gives it advantage over other soft drinks.

In India, we can see that the growth of Maruti Suzuki has been exponential over the last fifteen years. Initially, it was one of the major automobile companies. There was no significant competition from other countries. One of the economic moats of Maruti Suzuki is that they have a large number of service centres located all accross the country even in far remote places.

The HDFC Bank has grown from a small bank to become one of the largest banks in India. They used latest technology in banking and spread their branches not only in towns but also in suburban and rural areas earlier than the competition. These were the unique advantages that helped people to use its banking services smoothly both in rural and urban areas.

The economic moats are some of the reasons for the continuous growth of these companies which is reflected in the stock market by their share prices which have also grown continuously.

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