Broad and deep ditches built around castles, buildings and towns in the medieval times were called moats. Left dry or filled with water, their purpose was to provide defense and fortification against enemies. It was relatively difficult to build deeper and broader moats - which, of course, provided better defense against hostile parties.
Having a better moat was a competitive advantage. Castles have transformed into corporations now and competitive advantage between corporations has become a rather complex topic. The concept of moats, however, is still used in comparing corporations and evaluating them with respect to competitive advantages. While the term has not lost its luster, like everything else, it has transformed into a metaphor signifying the relative business strength of corporations.
With respect to financial analysis, the corporate moats are classified as Narrow or Wide. In fact the Morningstar Equity Research firm has trade marked the term as 'Economic Moat' to elaborate competitive advantages of different corporations in their research reports. They define the Economic Moat as:
"Morningstar's proprietary measure of the quantifiable, sustainable competitive advantage a company enjoys. All things held equal, we would expect a wide-moat firm to sustain relatively higher returns on invested capital for longer than a narrow-moat firm and a narrow-moat firm to sustain relatively higher returns on invested capital for longer than a no-moat company."
So, the Moat Value in combination with other evaluation parameters like yield, market cap, risk/volatility, current and fair value price can combine to form a great strategy for investment.
An equity with wide-moat with fair market value significantly higher than the current price with medium to low volatility risk is a good choice. It becomes even a greater choice if the equity has significant (greater than 500 million dollar) market cap with higher (more than 4%) yields.
When diligently followed, this investment strategy looks promising. Until I try this myself and then write the next blog on the topic, enjoy several beautiful pictures of moats by googling 'moat'.
Cheers!
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The author is a Senior Business Solutions Architect with AT&T Global Services. He is a Professional Engineer with APEGA, holds a bachelor’s degree in Electrical Engineering from University of Engineering & Technology, Lahore and a Master’s degree in Electrical & Computer Engineering from Concordia University, Montreal. His interests include reading, writing, photography, painting, promoting human development using Information Technology, applied research, innovation and optimized business solutions. He lives in Calgary, Canada and can be reached at uwaqar@gmail.com
