Moat refers to a water body surrounding a castle. It is said that moats surrounding the castles even had predators like crocodiles for extra safety. This moat protects the castle from being attacked.
In investing, the term is made famous by Warren Buffet and refers to characteristics of a business to protect itself from competition. Warren Buffett likes to invest in companies with large moat so that they can survive and are relevant even after 10 years, 15 years or 20 years. The idea is to remove / minimise the business risk while taking investment decisions and not overpay for it so that the inherent compounding in the business can take care of the returns.
The term these days have been made sort of generic. Everyone likes to use this term in their analysis. And the general feeling that I get is that companies with moat are now being considered to have been given a right to survive. Long-term investing in moat companies has become a holy grail for accumulating wealth.
But is it that simple?
Well, yes the answer to this is NO.
All that an "impenetrable" moat provides to the company is time to protect its castle. Presence of it just allows the company to first know that is being attacked, identify the attackers and then formulate strategies to protect itself. By very nature, the moat companies are in advantageous position to defend itself. Wider the moat, more the time company gets to protect itself. To protect itself, companies need to be proactive and act upon it when under attack rather that just relying on moat to defend the castle. Else, sooner or later, crocodiles and sharks in the moat will be killed and the walls will be breached.
Thus in no way there is a writing on the wall that moat companies can survive any catastrophe. By nature, they have been given a chance to protect themselves. But the rules of :Adapt or Perish" still apply to them.
Microsoft, in my opinion has (had?) one of the strongest moat. It has network effect whereby large number of user base and software developers are tied to each other. It has high tangible and intangible costs. Moving to other operating system can be expensive in terms of money as well as time invested. Lots of data resides on its Office suite, making it difficult to migrate. Can spend a large amount on R&D or sales promotion and spread it over millions of units. And of course the intangible in the form of a brand. Kids grow up looking at the Windows logo while starting a PC. It has become generic like Xerox.
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| Most of us have grown up looking at generations of windows logo while starting our PCs |
However, Microsoft' moat has been under attack for some years now. Google and Apple are moving the world towards mobile computing. They have changed the way we use "computers". I am writing this blog on a tablet at 4.30 in the morning and will give a finishing touch tomorrow morning at work. That's the power of internet that these companies are exploiting.
The game is disrupted and first movers have found themselves in an advantageous position. They are changing how the world computes. Microsoft is finding difficult to come out with products that can compete with Google. Future will go to the person that holds and controls maximum (online) data and it is Google's products where maximum amount of online data is generated (and stored).
But Microsoft has recognized this and is thus trying to defend itself. It is trying to get control on the search market by integrating its Bing platform in a lot of ways. It is pushing its Office cloud solutions aggressively. Currently, it is advantage Google (and other online platforms). But will Microsoft be able to get its lost glory? Only time can tell that. As for now, it is struggling to protect its moat (relevance) since mid-2000s.
Anyways, to conclude, having a moat is not something that gives the companies a right to survive over longer term. Risks still exists with these companies as well, though in lesser proportion as compared to others since in case of disruptions, you still may have some time to protect against permanent loss of capital. And of course, valuations is something that shouldn't be overlooked in this case as well since:
The game is disrupted and first movers have found themselves in an advantageous position. They are changing how the world computes. Microsoft is finding difficult to come out with products that can compete with Google. Future will go to the person that holds and controls maximum (online) data and it is Google's products where maximum amount of online data is generated (and stored).
But Microsoft has recognized this and is thus trying to defend itself. It is trying to get control on the search market by integrating its Bing platform in a lot of ways. It is pushing its Office cloud solutions aggressively. Currently, it is advantage Google (and other online platforms). But will Microsoft be able to get its lost glory? Only time can tell that. As for now, it is struggling to protect its moat (relevance) since mid-2000s.
Anyways, to conclude, having a moat is not something that gives the companies a right to survive over longer term. Risks still exists with these companies as well, though in lesser proportion as compared to others since in case of disruptions, you still may have some time to protect against permanent loss of capital. And of course, valuations is something that shouldn't be overlooked in this case as well since:
A great company need not be a great investment any all points in time.
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