Do your ASX shares have a moat?
If you’re not familiar with the investing term ‘moat’, it’s one that the great Warren Buffett coined many years ago. It refers to the concept of an intrinsic and protective competitive advantage a company has. In an ideal world, this moat should be wide enough that competitors can’t possibly cross it when they attempt to challenge said company.
What does a moat entail?
Just think of 2 of Buffett’s favourite companies: Coca-Cola and Apple. Coca-Cola is the world’s most iconic cola drink. Its brand dominance is so entrenched that I reckon almost every human being on the planet knows what a ‘Coke’ is.
This enables Coca-Cola to charge more for a drink than its competitors, whilst still being able to maintain its dominant market share. Thus, we can say Coca-Cola has a ‘brand moat’.
Apple operates with a similar level of branding power. It’s able to charge far more than any of its competitors for a computer or a smartphone, safe in the knowledge that people will be willing to fork out semi-exorbitant prices just for the privilege of owning ‘an Apple’.
What about ASX shares?
So how can we apply this concept to S&P/ASX 200 Index (ASX: XJO) shares or the companies in your own portfolio? Well, ask yourself, ‘what makes a consumer buy this product?’ Is it a lack of competition? A powerful brand that helps a company stay above the pack? There are many different kinds of moats, but if a company has one, this is usually a sign that its shares will make a good investment at the right price.
Let’s take Telstra Corporation Ltd (ASX: TLS). Telstra is arguably the most expensive telecom company offering mobile plans in Australia. Yet almost 50% of the market chooses to go with Telstra. That’s probably because Telstra’s mobile network is the fastest and most comprehensive in the country (as its ads keep reminding us).
This is something that Telstra’s competitors can’t easily overcome, hence I would classify Telstra as having a ‘moat’.
It’s a similar story with Transurban Group (ASX: TCL).
Transurban owns and operates a network of toll-roads across the country. If you don’t wish to use one of Transurban’s roads, the only alternative is to find another, longer route around the road which doesn’t attract a toll.
Thus, Transurban doesn’t really have any competitors apart from a free ‘long way round’.
Which companies in your ASX share portfolio would you say have a moat? Moats can protect a business in good times and in bad. And, as Warren Buffett’s track record shows, can also make a company an extremely lucrative investment. So make your next buy a company with a nice moat and your future self will probably thank you!
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Sebastian Bowen owns shares of Coca-Cola and Telstra Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of Transurban Group. The Motley Fool Australia has recommended Apple. 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.