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Do your shares have an economic moat?

The world seems to be full of ‘disruption’ and danger for businesses these days. Low-cost competition and new technology is completely changing industries.

Who would have thought that the taxi industry could be disrupted? Particularly the black cabs in London and the yellow cabs in New York. Now look at Uber and Lyft.

Who would have thought hotels could be disrupted? It’s a physical service yet Airbnb has added a completely new section of accommodation.

These days businesses have to be really good to genuinely have an economic moat. Will the product always be wanted? Does the brand appear to offer a truly superior product? Does it have intellectual property? Does it have an unbeatable platform or network?

Telstra Corporation Ltd (ASX: TLS) used to have an unassailable position with its telecommunications network until the NBN came along.

Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd’s (ASX: WES) Coles used to be the clear leaders now Aldi and Costco are muscling in on the duopoly.

However, think of Apple and the iPhone. Millions of people will only choose an iPhone each year, use the Apple App store, buy iPads as their tablets and so on. Apple’s ecosystem is very powerful. This is a great moat and Warren Buffett’s Berkshire Hathaway agrees – it has a huge stake.

DuluxGroup Limited (ASX: DLX) owns two of three large paint brands in Australia, being Dulux and British Paints. In Bunnings, the hardware Mecca of Australia, DuluxGroup’s paint brands dominate the paint section. It also has production scale which is hard to match.

REA Group Limited (ASX: REA) owns realestate.com.au, the leading property website in Australia. It attracts the most buyers, which in turn attracts the most sellers and so on. It’s impossible to suddenly replicate this. The market power allows REA Group to steadily increase prices significantly faster than inflation over the long-term.

Foolish takeaway

If your business relies on having some sort of advantage to be a good investment, you need to consider whether it has a genuine advantage or if it can taken away with a well-financed competitor or a new technology.

That’s why this top share is so exciting, it is the one doing the disrupting and could soon be a market leader.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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