Do your shares have an economic moat?

It seems more important to have economic moats.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The world seems to be full of 'disruption' and danger for businesses these days. Low-cost competition and new technology is completely changing industries.

Who would have thought that the taxi industry could be disrupted? Particularly the black cabs in London and the yellow cabs in New York. Now look at Uber and Lyft.

Who would have thought hotels could be disrupted? It's a physical service yet Airbnb has added a completely new section of accommodation.

These days businesses have to be really good to genuinely have an economic moat. Will the product always be wanted? Does the brand appear to offer a truly superior product? Does it have intellectual property? Does it have an unbeatable platform or network?

Telstra Corporation Ltd (ASX: TLS) used to have an unassailable position with its telecommunications network until the NBN came along.

Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd's (ASX: WES) Coles used to be the clear leaders now Aldi and Costco are muscling in on the duopoly.

However, think of Apple and the iPhone. Millions of people will only choose an iPhone each year, use the Apple App store, buy iPads as their tablets and so on. Apple's ecosystem is very powerful. This is a great moat and Warren Buffett's Berkshire Hathaway agrees – it has a huge stake.

DuluxGroup Limited (ASX: DLX) owns two of three large paint brands in Australia, being Dulux and British Paints. In Bunnings, the hardware Mecca of Australia, DuluxGroup's paint brands dominate the paint section. It also has production scale which is hard to match.

REA Group Limited (ASX: REA) owns realestate.com.au, the leading property website in Australia. It attracts the most buyers, which in turn attracts the most sellers and so on. It's impossible to suddenly replicate this. The market power allows REA Group to steadily increase prices significantly faster than inflation over the long-term.

Foolish takeaway

If your business relies on having some sort of advantage to be a good investment, you need to consider whether it has a genuine advantage or if it can taken away with a well-financed competitor or a new technology.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and Wesfarmers Limited. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ⏸️ Risk Managment

Two surfers, one older and one younger, high five with big smiles on their faces.
How to invest

Strategies for successfully navigating market volatility

Master the art of navigating market volatility and learn to ride the waves of the ASX for long-term growth and…

Read more »

ASX shares Business man marking buy on board and underlining it
⏸️ Risk Managment

World's largest fund manager says ASX volatility a great buying opportunity

Here's what the world's largest fund manager is saying about the share market right now.

Read more »

inflation written on wooden cubes being balanced with a piggy bank and small shopping basket
⏸️ Risk Managment

How these 2 fund managers have positioned their portfolios for inflation

These fund managers would rather be safe than sorry when it comes to inflation...

Read more »

inflation written on wooden cubes being balanced with a piggy bank and small shopping basket
⏸️ Risk Managment

Inflation? The tough choice facing all ASX investors right now…

Will inflation come sooner than we think? The answer can affect your ASX share portfolio

Read more »

A piggy bank attached a bicycle pump floats up, indicating rising inflation
Economy

3 things that might happen to ASX shares if inflation returns

Here are 3 things to watch out for if inflation returns...

Read more »

ASX 200 shares RBA taper quantitative easing represented by letters QE sitting on piles of cash
⏸️ Risk Managment

RBA might end QE in 2021! Will the ASX bubble burst?

Reports are suggesting that the Reserve Bank of Australia (RBA)'s quantitative easing (QE) program could be coming to an end.

Read more »

Hand holding a pin next to a bubble with a dollar sign in it
⏸️ Risk Managment

Will the ASX see a share market bubble in 2021?

After a better-than-expected 2020, will the ASX share market see a bubble in 2021? This commentator thinks so, here's why

Read more »

AGL capital raise demerger asx growth shares represented by question mark made out of cash notes
⏸️ Risk Managment

Is the share market starting to look like it did in 1999?

The Nasdaq Composite Index has just had a few years of massive gains. It's starting to look a little similar…

Read more »