In the middle ages, castles (monster homes of their day) were built for defensive purposes. They are located on high ground giving them a commanding view of the area and sometimes a moat was placed around castle for extra protection. The moat was not the lazy summer river to take a swim in, but more often a giant septic tank. If you have seen people emptying septic tanks, they take care not to come into contact with the material. Anyone trying to swim across the moat would likely get a disease or die.

In investing terms, a moat is about competitive advantage over the competition. Every year, the competitive nature of companies gets closer as technology allows consumers to have greater choice. However, some companies because of the industry they are in have a built in advantages: be in government regulations, access to raw materials, inventory management, brand awareness, regional strength, or something else. If a company has a strong moat for the competition had to cross, the company has a built in advantage and as long as it stays, making money can be routine. Once the moat is crossed, margins and profits fall.

Research firms are constantly trying to determine the moat and the effectiveness of it, among the firms which rate moats is Morningstar which gives a rating to all the companies it follows. However, just because a company has a moat does not mean it will last and the information should be used as one more tool to look at when researching companies. Typically, dividend producing companies have bigger moats than non dividend paying companies and that is one of the reasons you want to own them.

There are more questions than answers, till the next time – to raising questions.