Driving around my new Porsche Panamera in my home state of South Carolina gets me some strange looks.
Not because of some bizarre paint job or giant stickers. But because of the four-letter word on my license plate…
Source: Twitter @rbradthomas
There aren’t too many moats in the Palmetto State, after all.
My daughter asked me what it meant. And I told her that in the literal sense, a moat was a big ditch with water that usually surrounded a castle. Before there were guns, moats were considered a form of defense that prevented enemies from attacking.
Of course, what my license tag is referring to is not physical moats, but rather economic “moats.”
They’re at the core of almost everything we do at Intelligent Income Daily. And it’s why I named our franchise Wide Moat Research.
Today, I’ll show you why moats matter, examples of companies with their own sustainable moats, and a new “fortress” project we launched this week to help you create a moat around your own retirement.
What Makes a Strong Moat
Warren Buffett once said, “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital.”
A company’s moat comes from the competitive advantages that it has due to its brand, cost of capital, scale, or other factors such as intellectual property or switching costs.
I’ll give you some examples of economic moats in action.
Apple (AAPL) is the world’s largest brand. Half of Americans use an iPhone. Whenever the company releases a new model, people will camp out in front of stores hoping to be first in line to get their hands on the latest tech.
The power of Apple’s brand allows the company to price its products at a premium and enjoy steady demand from consumers.
Microsoft (MSFT) is one of only two companies with an AAA-credit rating. That’s higher than the U.S. government, which is one notch below at AA+. This rare designation gives the company access to some of the lowest-cost debt in the world.
Right now, if you were to get a 30-year mortgage, you would have to pay over 7% interest and you’d secure the loan with your house as collateral. Microsoft, on the other hand, can get a 30-year loan with less than 4.5% interest without any collateral.
So the company can use cheap money to buy companies like Activision (to grow its video game franchise) or invest in OpenAI (to improve its artificial intelligence AI technology).
Costco Wholesale (COST) is one of the largest grocers in the country. And it has an ingenious method to keep customers loyal and trafficking its stores.
Costco is famous for its hot dog and soda combo, which costs only $1.50. It’s been that same price since 1985. And the company hopes to keep it at $1.50 forever… If it had increased along with inflation, the hot dog combo should be worth more than $4 today.
How does the company do it? The answer is scale. Costco sells so many hot dogs that it can negotiate down the cost of ingredients. It even built its own hot dog factory so it could produce them cheaper.
And even if the company loses a little money selling hot dogs, it earns far more by attracting shoppers to its stores to buy other groceries.
As you can see, it’s tough to compete with a company that has an established economic moat. They will steal your customers, buy out the best opportunities, or undercut you on price.
A Wide Moat Makes the Best Fortress
You can see how having a moat can help a company survive economic downturns and keep growing its profits.
Now, I’m not recommending you buy Apple, Microsoft, or Costco today. Because aside from picking companies with moats, paying the right price is also important.
One way to invest in companies with moats is through the VanEck Morningstar Wide Moat ETF (MOAT). It tracks a basket of companies Morningstar’s equity team has determined to have a competitive advantage over others in their respective industries.
But you can build your own diversified basket of resilient companies, too. And when you do that with a focus on income, your portfolio will be equipped to withstand any economic onslaught.
A few years ago, I decided to build our research platform around the “moat” concept because our team recognizes that to select the very best stocks, you must seek out companies that offer the best long-term competitive advantages.
The best moats and castles – that stand the test of time – are called “fortress” companies. They have rock-solid fundamentals that make their business models sustainable. And they’re exactly the kind of companies our new investment service, Fortress Portfolio, uses to keep your money safe and growing, no matter what the stock market is doing.
Happy SWAN (sleep well at night) investing,
Editor, Intelligent Income Daily