Why Should You Care About Moats

I started reading about Buffet when I was in undergraduate days. I somehow got attracted to him. I was curious to learn what makes him do what he does. My quest for knowing more about Buffet led me to more wonderful things in life other than investing wisdom. It also introduced me to greats like Ben Graham, Charlie Munger, Phillip Fischer, Peter Lynch and many more. Warren Buffet is world's most successful practitioner of value investing. Ben Graham who is Buffet's Guru is the father of the practice.  Buffet changed value investing from Ben Graham's cigar butt to more of Charlie Munger's paying for quality Moat businesses. But over the years I have started to believe there exists no such term as value investing.

Nothing captures this more than Charlie Munger's words -

 "All sensible investing is value investing".

Equity markets give us an opportunity to investing in a multitude of businesses where the prices on offer keep on changing every day. Sometimes Mr. Market may throw bargains while there are times when it is quoting irrational prices. It gives investors an opportunity to choose when to invest. Investing in equity shares of a company is not buying pieces of paper its buying a share in a business. For a financial investor it's about partnering with a promoter as he goes around building and running the franchise. For any business to deliver good results it needs time in the same way for it needs time to get reasonably good results from any investment in equity shares. In the long run equity returns are anything but function of the performance of the underlying business. In the short run shares prices get influenced by a host of factors like market sentiments etc. It is always that quality franchise with honest managers tends to command premium in the market.

Real returns in the market can be made by maintaining a long term horizon.

As Charlie Munger once said "Money is not made by buying and selling…..but in the waiting"

 It is v! ery important for an investor to let his money compound .Great business are also great compounding machines. Great business enjoy above return, they have pricing power and tend to be market leaders in their respective arenas.   But in a capitalist society above normal profits tend to attract more investments and thereby more competition driving the returns to the long run mean. So a franchise which might look very profit today may not sustain it in the long run. The forces of market competition may chip away the factors which contribute to the above average returns. Investing in such businesses even for a long term horizon may not give above average returns. That is the reason we need to find businesses with enduring competitive advantage or Moats. Business which has such enduring competitive advantage or moat can withstand competition and still enjoy above average returns.

Competitive advantages can be illusionary or temporary in nature. They may disappear as conditions enabling such temporary competitive advantage wither away. For example Businesses which are earning above average returns due to favourabe business regulations like licences etc. or due to scarcity etc. It's important to understand the nature and reason behind the competitive advantage of the business.

So the next time when you come across a nice business franchise which you think is selling for a decent price proposition ask yourself just one question what makes this business franchise such a good one and if the reason can stay long enough for me as an investor to let the magic of compounding work for me. Just ask "Where's the moat", "Is it going to widen?"

Albert Einstein once said –

"Compound interest is the eighth wonder of the world. He, who understands it, earns it ... he who doesn't ... pays it."

Moats enable you to exploit the power of compounding. 

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Latest Guru Picks	Value Strategies
Warren Buffett Portfolio	Ben Graham Net-Net
Real Time Picks	Buffett-Munger Screener
Aggregated Portfolio	Undervalued Predictable
ETFs, Options	Low P/S Companies
Insider Trends	10-Year Financials
52-Week Lows	Interactive Charts
Model Portfolios	DCF Calculator
RSS Feed	Monthly Newsletters
The All-In-One Screener	Portfolio Tracking Tool

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