Overview: Why a Moat Vest? The philosophy of investing in businesses with economic defensibility, or Economic Moats, was made famous by Warren Buffett in his 1995 annual shareholder meeting:
"What we're trying to do," he said, answering a question from the audience, "is we're trying to find a business with a wide and long-lasting moat around it, surround -- protecting a terrific economic castle with an honest lord in charge of the castle."
"What we're trying to find is a business that, for one reason or another -- it can be because it's the low-cost producer in some area, it can be because it has a natural franchise because of surface capabilities, it could be because of its position in the consumers' mind, it can be because of a technological advantage, or any kind of reason at all, that it has this moat around it."
How was the Moat Vest curated? We have applied this philosophy to select US companies that have (1) dominant market share in their respective industries, and (2) wide business moats. Companies with wide business moats have the ability to maintain competitive advantages, which help them grow, gain market share, and improve profit margins into the future. We have identified four sources of competitive moats. The companies in this Vest may have derived their moat from one or more sources described below:
Network Effects: As more people use a product or service, the said product or service becomes more valuable. For example:
- The more people use Google’s products, the more data the company has, making its search engine superior.
- Similarly, Facebook’s suite of apps (Facebook, Instagram, WhatsApp) are more valuable to you as the user when more of your friends and family are on the apps. In turn, this allows Facebook to capture a significant amount of user attention that attracts advertisers. Advertisers can very easily create and deploy ads to Facebook’s more than 2 billion users that exist on different platforms.
Intangible Assets: These include brands, patents, and regulatory licenses. For example:
- Apple has a very strong brand, allowing it to command premium pricing and maintain higher margins when compared to other smartphone makers.
- Disney has spent the past 15 years acquiring other franchises such as Marvel Entertainment, Lucasfilm (owners of the Star Wars franchise), and Pixar. These franchises in turn enable Disney to increase customer loyalty that can be monetized through multiple channels (movies, merchandise, and theme parks). Note that due to the COVID-19 global lockdown, Disney’s park operations have been halted indefinitely (at the writing of this article), which increases the risk of investing in Disney since Theme Parks currently contribute about 40% of the company’s operating income (FY 2019).
- Intuit is a software financial and accounting software provider for individuals and small businesses. Two of its core products, Quickbooks and TurboTax, enjoy market leadership in the small business accounting and DIY tax preparation sectors. This market leadership translates to strong brand awareness.
Switching Costs: High switching costs - whether it be financial, effort, or time-based - will enable companies to retain customers longer, giving those companies more pricing power. For example:
- Amazon and Microsoft provide cloud and software services to various companies, often providing the backbone infrastructure for their businesses. Moving from one cloud provider to another is an extremely time consuming and potentially expensive process, which may deter a company from doing so. This in turn translates to long-term stable revenue for the cloud providers.
- Salesforce is the global leader in Customer Relationship Management software, delivering its services through recurring cloud subscriptions. Many large companies rely on Salesforce to store and manage their sales leads, analytics and data. The data is difficult to migrate to other providers - creating high barriers to switching, which gives the company recurring stable revenue.
Scale: Some industries require significant scale in order to capture lower cost structures. Achieving significant scale can deter competitive entrants. For example:
- Semiconductor manufacturing is one of the most capital-intensive industries, requiring larger and larger capital investments for R&D and manufacturing. This trend favors incumbents such as Intel and TSMC, two of the largest semiconductor manufacturers in the world. These two companies have the lion share of global chip manufacturing, enabling them to spread the large capital costs over a very large volume, lowering their unit cost structure when compared to their smaller competitors.
- Netflix has more than 167 million global paying subscribers. This large user base of paying customers gives Netflix structural content cost advantage. For every dollar the company spends on new content, it can spread it over a very large user base, giving the company an advantage over its smaller competitors.
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Vests are curated portfolios that consist of stocks and/or ETFs. Vests are constructed with different goals or themes in mind. Some Vests are built to enable investors to invest into diversified core assets that balance performance and downside protection, while other Vests are theme based, enabling investors to narrowly focus their investments on specific industries or core themes.
Note that analysis of each company's public information including its financial statements, website, and management's public statements were performed to determine the nature of involvement in the industry and its economic moat. This analysis may be based on limited information, and may become outdated. Companies may provide misleading or false public information regarding their involvement in the industry, strength of its business or the size of its market share.