Iconic investor Warren Buffett has long touted the importance of searching for long-term value in companies with durable competitive advantages by modifying his initial value-based Graham-Dodd investing logic to incorporate a more subjective concept of a “moat.”
Similar to the medieval castles of Northern Europe, where an already near-impenetrable fort was encapsulated with an additional layer of security (a wide water and alligator-filled moat), having a company with an added layer of protection from the return-killing power of competition is a very valuable asset indeed.
A durable competitive advantage can manifest itself in a number of forms, from intellectual property to patents, operational excellence or strategic advantages unique to said firm. Investing one’s hard earned money into an enterprise should, in theory, be the result of said company having something “special” which justifies a dominant competitive position for a long period of time.
With competition representing one of the key factors which can erode profitability over time, insulated companies with little bottom line exposure over a long period of time could be considered prime candidates off the top.
Companies like Walt Disney Co. (NYSE:DIS) stand as shining examples of companies which have not only survived but thrived over decades; maintaining a lead in one’s industry is perhaps hardest to do as times evolve and technology continues to disrupt the traditional means by which companies deliver their products to market.
The timeless “forever” companies Buffett and others talk about are often those with the biggest moats – an excellent starting point for investors looking to build a long-term portfolio.
Invest wisely, my friends.
