Crucial Importance of Growing Moats
The best investments are in companies that are actively fortifying and growing their competitive advantages, not ones that rely on past successes.
As investors, we all know that businesses with wide, defensible moats around their operations make for great long-term investments. Companies like Coca-Cola, Microsoft, and Walmart have built up substantial competitive advantages over decades that protect their profits and market share. But the key to truly great investing isn't just finding companies with wide moats - it's finding ones with growing moats. Let me explain why this distinction is so important.
Take the examples of Blockbuster, Yahoo, and Nokia. These were all companies that at one point had seemingly impenetrable moats around their businesses. Blockbuster dominated the video rental market, Yahoo was the king of web portals, and Nokia was the global leader in mobile phones. On the surface, they looked like fantastic investments.
However, these companies all made the fatal mistake of becoming complacent. They assumed their wide moats would protect them forever, and they failed to invest in expanding and strengthening those moats. As a result, agile upstarts like Netflix, Google, and Apple were able to come in and completely disrupt those seemingly unassailable market positions.
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In contrast, let's look at some examples of companies that have consistently invested in growing and fortifying their moats:
Amazon: The e-commerce giant has poured billions into logistics infrastructure, cloud computing, and content creation to widen the gap between itself and competitors. Its moat just keeps getting deeper.
Apple: Apple spends enormous sums on research and development to continually innovate and improve its flagship products like the iPhone. This allows it to stay ahead of rivals and maintain its premium brand status.
Walmart: The retail behemoth hasn't rested on its laurels. It has aggressively expanded its online ordering and pickup services to fight off the threat from Amazon. It's constantly working to make its supply chain and operational efficiency even better.
The lesson here is clear: Having a wide moat is important, but it's the direction of that moat that truly matters. The best investments are in companies that are actively fortifying and growing their competitive advantages, not ones that rely on past successes.
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As you evaluate potential stock investments, pay close attention to how the company is investing in its future. Are they putting resources into R&D, marketing, and capacity expansion? Or are they just trying to maximize short-term profits at the expense of long-term positioning? The answer to that question could mean the difference between a winning investment and a portfolio disaster.
Signs of a Growing Moat
Investment in Innovation. Companies that put resources into research, marketing, or infrastructure are often growing their moat. Apple doesn’t just stick with the iPhone - it invests in improving products and creating new ones like the Apple Watch or services like Apple Pay. These moves make it tougher for competitors to catch up.
Avoiding Short-Term Temptations. Companies with a long-term focus often keep their moats growing. Think of Costco, which focuses on providing low prices, high-quality products, and good pay for employees rather than cutting corners for quick gains. It doesn’t rely on discounting its brand just to boost short-term sales, unlike brands that dilute their exclusivity for short-term profits.
Building Strong Relationships. A business like Amazon has a moat that touches many areas: customers get good prices, suppliers reach millions of buyers, and even small businesses benefit from its marketplace. Amazon keeps expanding its services and logistics, which helps it grow its moat across sectors, from e-commerce to cloud computing.
This is not a financial or investing recommendation. It is solely for educational purposes.
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