The Moat

The Moat

Moat (or economic moat) is a term that was popularized by Warren Buffet. The term simply refers

to the company’s competitive advantage (over its competitors). A company with a strong moat,

ensures the company’s long term profits are safeguarded. Of course the company should not

only have a moat, but it should also be sustainable over a long period of time. A company which

possesses wider moat characteristics (such as better brand name, pricing power, and better market

share) would be more sustainable, and it would be difficult for the company’s rivals to eat

away its market share.

To understand moats, think of “Eicher Motors Limited”. Eicher Motors is a major Indian automobile

manufacturer. It manufactures commercial vehicles along with the iconic Royal Enfield bikes.

The Royal Enfield bikes enjoy a huge fan following both in India and outside India. It has a massive

brand recall. Royal Enfield caters to a niche segment which is growing fast. Their bikes are

not as expensive as the Harley Davidson nor are they as inexpensive as probably the TVS bikes. It

would be very hard for any company to enter this space and shake up or rattle the brand loyalty

that Royal Enfield enjoys. In other words, displacing Eicher Motors from this sweet spot will require

massive efforts from its competitors. This is one of Eicher Motors’ moat.

There are many companies that exhibit such interesting moats. In fact true wealth creating companies

have a sustainable moat as an underlying factor. Think about Infosys – the moat was labor

arbitrage between US and India, Page Industries – the moat was manufacturing and distribution

license of Jockey innerwear, Prestige Industries – the moat was manufacturing and selling pressure

cookers, Gruh Finance Limited – the moat was small ticket size credits disbursed to a certain

market segment…so on an so forth. Hence always invest in companies which have wider economic

moats.