Economic moat is the center of Buffett's investment philosophy. The moat enables a company to maintain a high level of return on investment for a long time. Morningstar summed up five common moats, each of which can be found in Buffett's stocks.
1. Effective scale, that is, natural monopoly. Natural monopoly will appear when the market where only a single company provides services is the most effective. Generally speaking, the natural monopoly market economy is huge in scale and needs high fixed capital expenditure. Examples include regulated public utilities, newspapers, railways and pipelines. 20 10 Buffett buys Burlington North Santa Fe Railway.
2. The conversion cost is high, and enterprise database software and services are typical examples. Because switching these systems is complicated and expensive, it is more likely to suspend basic services. 20 1 1, Buffett bought about 1 1 billion dollars of stock IBM(IBM (listed in the United States).
3. Cost advantage, that is, being able to sell products at a lower price than competitors. This is similar to the effective scale, but it can be produced by more factors. For example, Wal-Mart (WMT, listed in the United States) embeds the cost advantage into the corporate culture, advocates attaching great importance to cost control and prudent capital allocation, has a good logistics system, and can obtain the most favorable terms from suppliers and workers. Baxian has been holding Wal-Mart shares since 2005.
4. Intangible assets can be divided into government franchise and brand.
Government concession is a special right granted by the government, and a common example is the patent granting the monopoly right of invention. The right enjoyed by the state-recognized statistical rating agencies is another kind of government privilege. The credit ratings of Moody's, Standard & Poor's and Fitch are written in numerous contracts, regulations and investment requirements. Although many mature investors pay more attention to market indicators such as CDS spreads than credit ratings, almost all bond issuers attach great importance to ratings, which makes the income of the three major rating agencies continue. Buffett acquired Moody's (MCO) in 2000, but gradually sold its shares since the financial crisis.
B. Brand is an identity derived from social identity and numerous advertisements. Based on some quirks in the brain, consumers will be willing to pay high prices for branded products. Coca-Cola (KO, listed in the United States) is just carbonated sugar water, but it won Buffett's "responsibility" because of overwhelming advertisements, so it can sell Coca-Cola at a high profit. Buffett bought Coca-Cola for the first time on 1998, and has never sold a share so far.
5. The network effect describes that the more users, the greater the value of the service or product. Credit card payment system is a typical example. Because there are enough merchants and users involved, whether it is Visa(V, listed in the United States), MasterCard (Horse, listed in the United States) or American Express (AXP, listed in the United States), their systems can be self-sustaining and reliable, and it is difficult for outsiders to destroy them. 1963, American Express's share price plummeted because of its involvement in the salad oil scandal, but Buffett took the opportunity to buy in a big way and held it to this day.
In fact, only a few companies can achieve high return on capital within a few decades. Charlie Munger pointed out: "In the United States, if a person or organization invests most of its wealth in three excellent domestic enterprises for a long time, it will almost certainly become rich. He claimed that most of the value of Ba County only came from the good concept of 10. The real difficulty is to define these concepts and stick to them.