Kinjal Parekh


Oxford dictionary defines a Moat as a deep, wide channel that was dug around a castle and filled with water to make it difficult for enemies to attack. In medieval times, all the castles had a moat to protect them from outsiders, having a moat made it extremely difficult for enemies to enter the castle.

But have you heard of an Economic Moat

The concept of Economic moat was popularized by Warren Buffett, the concept refers to a business’ ability to gain a competitive advantage over its competitors, in order to protect its market share and long term profits from competing firms.

The strength and the sustainability of a company’s moat help us to determine the firm’s ability to prevent a competitor from taking the business away or eroding its earnings.

Consider an example of a Shopkeeper who owns a sweet shop in Mumbai. He has different varieties of sweet but the one sweet that his shop is famous for is a special type of Kaju Katri, now, in this case, we can say that the shopkeeper has this special sweet which acts as a competitive advantage for him. This competitive advantage will be with him unless some other shop sells the same sweet with the same taste. This competitive advantage has helped him to project his market share over others.

Why must investor look for economic moat in a company?

Here is a question for you – would you want to invest in a company that has a bleak future?

I am sure your answer is NO.

The main reason why we invest is to create wealth. Investors must identify companies that can generate high returns over long periods.

They must first achieve a long-term competitive advantage to sustain in this competitive world. What can make them more preferable than their competitors?

4X Target in 10 Years Economic Moat

How to determine if a company has an economic moat?

Now that we understand what economic moat is, let’s discuss how to identify companies with economic moat. 

Here are three best ways to identify a company’s economic moat. 

1. Historical profitability

Analysing economic moat factors is more qualitative rather than quantitative. Is the firm able to generate solid returns for its shareholders?

But what if the company does not know how to use its resources efficiently to generate profits?

Hence, you must always analyse the company’s past financial record first.

Read the company’s annual report. Conduct ratio analysis. Compare their financials with their competitors.

2. Sustainability of the company

You must evaluate how long the company will be able to keep up with market competitors. You can do this by comparing the sales and profit figures of the companies.

This is also referred to as the company’s competitive advantage period. It can be as long as several decades or just a couple of months. The longer the competitive advantage period, the better is the company’s economic moat.

For example, there was a time when Vodafone enjoyed a huge share of loyal customers. They were one of the leading telecom service providers in India. But things changed when Jio, it’s competitor, entered the market. Today, Vodafone Idea is on the verge of going bankrupt.Watch this video by CA Paras Matalia where he talks about Vodafone Idea Limited and why it is where it is now.

3. Industry analysis 

Does the industry have many profitable firms? Or does it consist of only a few companies that are hypercompetitive? Use Porter’s five forces to conduct an industry analysis. It also helps us identify a company’s economic moat in the simplest way possible.

The forces bring forth a company’s position amongst its competitive rivalry. The five forces include –

  1. Competition in the industry
  2. Threat of new entrants.
  3. Power of suppliers
  4. Power of customers
  5. Threat of substitute products

Porter’s Forces help us check the quality of a company and industry. The model is applied to understand the competition within the industry. It helps identify an industry’s barrier to entry, efficiency, scale of business, cost of capital, pricing power, cost advantages, etc.

By thoroughly analysing an industry, one can easily identify which economic moat a company holds over others.

Watch this video to understand how you can use Porter’s Five Forces to conduct industry analysis –

Four Main Types of Economic Moat

A company can have more than one economic moat. Now that you know how to analyse a company to identify their moats, let’s talk about the different types of economic moat.

Here are four example of strong economic moats a company can hold –

Low-cost supplier

Companies have a distinct competitive advantage if they can produce goods and services at a low cost.

Dmart is a great example of a low-cost provider. Their low operating cost and bargaining power allows them to sell goods to customers at cheaper prices. This makes them more preferable over others by consumers. This makes them one of the dominant players in retailing. 

High switching costs

Switching costs are a one-time expense or inconvenience cost. A customer would incur such costs to switch over from one product to another.

Customers always need a very strong reason to switch services. If a company can make it tough for its customers to use a competitor’s product, it is a good sign. 

The network effect

The network effect is a phenomenon where increased numbers of users, people or participants improve the value of a good or service.

For example, there are millions of people using Whatsapp, Facebook, ClubHouse, Linked In, etc.

This is one of the most influential competitive advantages. It comes into play when a company gives out a new update. The new system update or a new feature will attract new customers and will benefit the existing customers at the same time. This can be considered as a first-mover advantage

They make the company’s product and service more valuable. These products and the ideas can be copied but the network effort will prevent the existing customers from switching to another network.

Intangible assets

Intangible assets include what one can feel but not see. They don’t have a physical presence. Intangible assets give companies a competitive advantage over their competitors. This includes –

  1. Intellectual property rights
  2. Patents and trademarks
  3. Copyrights
  4. Government approvals
  5. Brand names
  6. Unique company culture
  7. Geographic advantage

For example, for a pharmaceutical company, intangible assets play a huge part in determining their moat. This includes trademarks, brands acquired, research and development, designs, technical know-how, licences, etc.

End Note

Economic moat helps companies keep their competitors at bay. But to be able to recognize a company’s economic moat, one must have analytical skills. 

The degree of your analytical skill will help you identify which company is better than the other to invest in.

Successful long-term investing is not just about strong financial numbers. The quality of the company is equally important. Successful investing is more about identifying and investing in companies that have the ability to stand the test of time. 

To identify such stocks, one needs to research various companies aggressively. At StockBasket, along with 2 crore data points, our technology evaluates and invests in stocks who are fundamentally strong and can pass a 5-years bondtest.

That means, at StockBasket, we select stocks which investors can own without losing their sleep even if the markets shut down for the next five years. We strongly believe in Buffett’s saying – ‘our favourite holding period is forever.’

Identifying economic moats is useful while evaluating a long terms investment option. It requires a little more effort than just analysing reported numbers. 

This is one of many qualitative factors which you must analyse before investing. To save you from trouble, allow us to introduce you to StockBasket. At StockBasket, we curate a mini-stock portfolio to cater to your varied financial goals.

For example, here is a basket full of quality stocks of the company which are irreplaceable.Explore the Largest Irreplaceable Networks Basket. This basket allows you to invest in companies that have a large, reliable network of distributors and are virtually irreplaceable.

With StockBasket, you don’t have to worry about reviewing your portfolio every now and then. We do that for you! You can start with a small investment of just Rs 2,500 in one of our baskets. 

Simply open a FREE Demat account with Samco and get free access to StockBasket!

Recommended Read:How does StockBasket work?

Warren Buffett is one of the most respected and popular investors of all time. He was born in Omaha on August 30th, 1930. He developed an interest in the world of investing at an early age of 11. As of April 2021, his net worth is over the US $100.6 billion.

The exciting part that appeals to people is his ability to consistently beat the stock market for over 60 years. He was nicknamed the Oracle of Omaha for his brilliancy in investment selections.

What is his secret to success? What made him an investment legend?

Let’s find out!

Buffett’s First Investment and First Investment Lesson

Buffett made his first investment in a stock at an age of 11. He said, ‘I was wasting my life up until then’ when he was asked about his first investment.

In 1941, he purchased six shares of Cities Service preferred stock at a cost of US $38 per share. Shortly after, the share price fell to US $27. Buffett started to panic as the price declined. But soon, the share price climbed back to US $40 and he immediately sold all his shares.

Soon after he sold his investment, the share price shot up to more than US $200 per share.

This was when Buffett learned his first investment lesson of the virtue of patience.

The stock market is designed to transfer money from the active to the patient.’ – Warren Buffett

To pursue his higher studies, Buffett applied for Harvard Business School but was turned down. He eventually enrolled at Columbia University after learning that Benjamin Graham, the father of value investing, taught there. Buffett had read Graham’s book Security Analysis multiple times and looked at this as an opportunity to learn more from his idol.

Buffett was a successful student and this gave him an opportunity to directly work with Graham. He later claimed this to be one of the most valuable experiences of his lifetime.

Buffett Partnership Years

After his stint with Graham, Buffett started setting up investments focused on bargains. 

He soon discovered companies that were trading at a discount to their net asset value. This is popularly known as the Cigar-butt approach. Buffett adopted this approach from his mentor Benjamin Graham. 

Describing this approach, Buffett said –

‘Cigar Butt approach to investing is where you try and find a really kind of pathetic company but it sells so cheap that you think there is one good puff left in it. Though the stub might be ugly and soggy the bargain purchase would make the puff all free.

In this approach, Buffett would buy a large stake at bargain prices and wait for market sentiments to improve. Improvement in market sentiments would drive the share price up. Buffett would immediately sell this stake to earn profit.

During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnership performance.

These letters are available in the public domain and are a must-read for investors. They withhold invaluable investment rationales and philosophies.

Warren Buffett Investment Strategies – Value Investing

Warren Buffett strongly advocates for value investing. He focuses on identifying undervalued quality stocks and investing in them for the long term.

Buffett’s two investment ground rules are –
  1. Buy what you understand 
  2. Invest only for long term

Buffett became one of the wealthiest men in the world by following these two simple rules.

He invests in companies only if he understands their business operations. This habit saved him from suffering massive losses during the dot com bubble burst.

Between 1995 to 2000, internet and technology companies were new and untested. Buffett did not understand the tech and stayed away from investing in such companies. When the markets came crashing down during the bubble burst, Buffett safely avoided the crash  by simply staying away from what he did not understand.

‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.’

#DidYouKnow Warren Buffett holds stocks of Coca-Cola, Wells Fargo, and American Express for more than 20 years. He once said that he has no intention to sell them.

You might be wondering, what is the point of holding it for this long? Why not instead indulge in short term and make quick money?

The simplest answer is that the power of compounding needs time and patience to do wonders.

Buffett learned this the hard way when he failed to earn higher returns from his first investment. He never dared to repeat the same mistake again and we all know how well it has paid off. Every year his investment compounds and adds value to his portfolio. All he had to do is research quality companies, invest in them and hold.

When you buy a stock, your intention should be to hold it no matter what. Look beyond the negative news. Most of them are speculations and are short-lived. If the company’s fundamentals are strong, they will outlive all their bad days and fetch you returns in the long run.

Impatient investors let anxiety and emotion control their decision-making. The best way to improve your patience is by ignoring the outside noise.

These two rules seem easy to follow, right?

As easy as they might seem, lot of investors fail to follow them. They normally end up not earning much or even worse losing their capital. 

Every investor tries and wishes. But many fail to follow the route.

But don’t worry. We at StockBasket have the right solution for you. Explore Value Buy 2020 Basket is built to take advantage of Warren Buffett’s investment strategies. Our experts have created a basket of value stocks that Buffett would buy. So you can invest in them with ease.

With StockBasket, you don’t have to worry about checking your portfolio every now and then. We do that for you! You can start with your investment of just Rs 2,500 in your preferred basket. Simply open a FREE Demat account with Samco and get access to StockBasket!

Warren Buffett’s Investment Philosophy –

Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment in 1964.

He then realised that the company was getting stiff competition from domestic as well as foreign plants. The future was not very bright. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund. 

Expensiveness in stocks made Buffett shift his investment philosophy. He no longer relied on the idea of bargains to stocks that were merely cheap and had wonderful business prospects. But in fact, he adopted a philosophy which believes that it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Warren Buffett and his Circle of Competence

Buffett says that it is important to know one’s circle of competence and stick with it. He added that the size of that circle of competence is not very important. But knowing the boundaries is very vital.

He says, ‘what an investor need is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence.’

Watch this video to learn how you can develop your own circle of competence with the help of a very practical example –

Here are few Warren Buffett stocks by the number of shares held based on Berkshire Hathaway’s most recent 13-F filing.
 SymbolHoldingsMkt. priceValueStake
AbbVie IncABBV2,05,27,861$120.57$2,475,044,2011.20%, Inc.AMZN5,33,300$3,421.57$1,824,723,2810.10%
American Express CompanyAXP15,16,10,700$164.26$24,903,573,58219.10%
Aon PLCAON43,96,000$285.34$1,254,354,6401.90%
Apple IncAAPL90,75,59,761$153.12$138,965,550,6045.50%
Bank of America CorpBAC1,03,28,52,006$41.66$43,028,614,57012.30%
Bank of New York Mellon CorpBK7,43,46,864$55.18$4,102,459,9568.60%
Bristol-Myers Squibb CoBMY2,62,94,266$67.21$1,767,237,6181.20%
BYD Co. LtdBYDDF22,50,00,000$33.60$7,560,000,0008.20%
Charter Communications IncCHTR52,13,461$814.20$4,244,799,9462.80%
Chevron CorporationCVX2,31,23,920$98.39$2,275,162,4891.20%
Coca-Cola CoKO40,00,00,000$56.18$22,472,000,0009.30%
DaVita IncDVA3,60,95,570$131.14$4,733,573,05034.40%
General Motors CompanyGM6,00,00,000$49.17$2,950,200,0004.10%
Globe Life IncGL63,53,727$95.98$609,830,7176.20%
Itochu CorporationITOCF8,13,04,200$29.56$2,403,352,1525.10%
Johnson & JohnsonJNJ3,27,100$173.66$56,804,1860.00%
Kraft Heinz CoKHC32,56,34,818$36.12$11,761,929,62626.60%
Kroger CoKR6,17,87,910$46.20$2,854,601,4428.30%
Liberty Global PLC Class CLBTYK18,76,522$28.58$53,630,9990.50%
Liberty Latin America Ltd Class ALILA26,30,792$14.22$37,409,8625.20%
Liberty Latin America Ltd Class CLILAK12,84,020$14.36$18,438,5270.70%
Liberty Sirius XM Group Series ALSXMA1,48,60,360$49.50$735,587,82015.30%
Liberty Sirius XM Group Series CLSXMK4,32,08,291$49.40$2,134,489,57519.20%
Marsh & McLennan Companies, Inc.MMC41,96,692$156.41$656,404,5960.80%
Mastercard IncMA45,64,756$353.05$1,611,587,1060.50%
Merck & Co., Inc.MRK91,57,192$76.50$700,525,1880.40%
MONDELEZ INTERNATIONAL INC Common StockMDLZ5,78,000$62.16$35,928,4800.00%
Moody’s CorporationMCO2,46,69,778$381.09$9,401,405,69813.20%
Organon & CoOGN15,50,481$33.72$52,282,2190.10%
Procter & Gamble CoPG3,15,400$142.93$45,080,1220.00%
Restoration Hardware Holdings, Inc common stockRH17,91,967$716.75$1,284,392,3478.50%
Sirius XM Holdings IncSIRI4,36,58,800$6.27$273,740,6761.10%
Snowflake IncSNOW61,25,376$297.85$1,824,443,2422.10%
SPDR S&P 500 ETF TrustSPY39,400$452.23$17,817,8620.00%
StoneCo LtdSTNE1,06,95,448$49.50$529,424,6763.40%
Store Capital CorpSTOR2,44,15,168$35.89$876,260,3809.00%
Teva Pharmaceutical Industries LtdTEVA4,27,89,295$9.40$402,219,3733.90%
T-Mobile Us IncTMUS52,42,000$137.90$722,871,8000.40%
United Parcel Service, Inc.UPS59,400$194.01$11,524,1940.00%
US BancorpUSB14,65,17,349$57.08$8,363,210,2819.90%
Vanguard 500 Index Fund ETFVOO43,000$415.76$17,877,6800.00%
Verisign, Inc.VRSN1,28,15,613$216.15$2,770,094,75011.50%
Verizon Communications Inc.VZ15,88,24,575$54.77$8,698,821,9733.80%
Visa IncV99,87,460$231.23$2,309,400,3760.50%
Wells Fargo & CoWFC6,75,054$48.41$32,679,3640.00%
TOTAL   $323,861,361,225 
Source: CNBC (as of August 2021)

Buffett created this portfolio by religiously following value investment strategies which we discussed above. But there is one more thing which one cannot ignore which played an important role in the making of The Oracle of Omaha.

Buffett, His Books, and His Reading Habit

One common habit amongst all successful people is their habit to read. Warren Buffett reads more than 500 to 600 pages every day. He reportedly spends almost six hours a day reading books. 

Surprisingly, he has never written a book but infact has more than 47 books with his name in the book’s title. His annual letters to his shareholders always include a couple of book recommendations.

Two very famous books which the Oracle of Omaha has mentioned at multiple occasions are –

  1. The Intelligent Investor by Benjamin Graham, and
  2. Security Analysis by Benjamin Graham and David Dodd

Both these classic investment books majorly focuses on value investing. Benjamin Graham, also known as the Father of Value Investing, led the foundation of this investment style.

So, before anything else, make sure you read at least these two books to understand Buffett’s investment strategy in a better way. We have listed down seven books that Warren Buffett says are a must read for every investor here.

End Note:

Buffett has developed an expertise in looking for quality and fundamentally rich businesses. He selects companies solely based on their overall potential. 

He places a great deal of importance on investing in companies having an economic moat. These are companies with an advantage, legal or operational which prevents competitors from entering and affecting margins of the business. 

There is an ocean of wisdom with this billionaire investor. Few things that I would love my readers to inculcate in their investment philosophy is –

  1. Start investing as early as you can.
  2. Always invest in wonderful businesses with an economic moat
  3. Invest in your circle of competence
  4. Invest for the long term.

This will help you start your wealth compounding journey in the right direction.

If you start investing Rs. 1,000 today, every month, for the next 40 years, you will be able to create a wealth of approximately Rs. 72,788,853.

How did I calculate that? How can your monthly investment give you a return in lakhs?

Warren Buffett made the best of this secret. It is your turn now!

Read what is the power of compounding and how Warren Buffett compounded his wealth over all these years.

The best investment approach is to buy quality stocks after analysing the company’s fundamental aspects.

Invest in the companies who has the potential to give superior returns in the long term. StockBasket operates on the exact same principle. It has various expert-curated portfolios or basket of stocks to suit varied investment requirements.To enjoy these expert services and to invest in StockBasket, open a FREE Samco Account today. It is time for you to start investing smartly!

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