Ch4: Identify a Moat

Q2: Does the business have a wide Moat?

"durable competitive advantage that protects it from attack, like a moat protects a castle" - Mr. Buffet

Moat protects from inflation and competition.

• Commodity businesses have no entry barrier.
• Businesses with wide Moats can keep up with inflation by passing costs to consumers - some kind of monopolistic position

THE FIVE MOATS

1. Brand - A product u r willing to pay more for because u trust it.
2. Secret - A biz that has a patent or trade secret that makes direct competition illegal or very difficult.
3. Toll - A biz with exclusive ctrl of a mkt -- giving it ability to collect a "toll" from anyone needing that service or product.
4. Switching - A biz that's so much a part of your life that switching isn't worth the trouble.
5. Price - A biz that can rice products so low n0 one an compete.

THE BIG FIVE

These 5 numbers are proof of the existence of a Moat:

1. Return on Invesment Captial (ROIC or ROC or ROI)
2. Sales (or Revenue) growth rate
3. Earnings per Share (EPS) growth rate
4. Equity (or Book Value or BVPS) growth rate
5. Free Cah Flow (FCF) growth rate

All of the Big Five should be equal to or greater than 10% per year for the last 10 years.