Wide moat investing summit

Kodak failed to develop it and then embrace the internet and its possibilities for fear of cannibalising the profitable silver-halide photography business, in which it was the global leader. Kodak filed for bankruptcy in Cost advantages from large-scale operations can dwindle if a company loses customers through poor service or a change in technology. The reduced sales volumes meant it would have been hard to manufacture new, competitive products as cost-effectively as before even if it had managed to come up with them.

Even large, respected companies with wide moats can launch products that flop. But most can survive when their flops affect only a modest proportion of annual sales — and provided mistakes are corrected and the company learns from them. It was launched in The new drink was greeted with public outrage and was withdrawn after a few months.

The original formula was reintroduced and rebranded as Coca-Cola Classic. A second example is the Apple Newton, a personal digital assistant launched in , which sold only 50, in its first four months. The whole product line was discontinued in It sometimes takes a long time for the merits of a firm with a wide moat to be recognised by investors, and hence for its share price to reflect its quality and potential.

A good example is ASML, the market leader in precision lithography, which is the key step in making semiconductor chips. It also has a monopoly on extreme ultra-violet EUV lithography systems, used to make the most advanced chips. What to look for There are several key characteristics to look for when hunting for businesses with wide moats. These are the likely longevity of the moat, the odds of strong market growth continuing, high margins and low debt.

And a company needs to avoid mistakes that can prejudice its reputation, brand or market share. We have seen how a wide moat can be impaired and a new disruptive technology can quickly cause problems for a global leader in an apparently impregnable market position. The importance of low debt is, firstly, that should interest rates rise, the company will not be saddled with rising payments that could reduce profits and limit strategic options.

Secondly, low debt gives the company the financial flexibility to rectify any mistakes, such as a product flop. Three options for investors There are three ways of investing in a diversified set of firms with wide moats. The first is to select your own set of companies with wide moats chosen from several sectors and with an eye to the dividend yield you are targeting.

The second is to go for an investment trust with a substantial proportion of its holdings in such companies — preferably one trading at a discount to the value of its portfolio of companies at a discount to its net asset value, or NAV , in other words. The current discount to NAV is 4. Among its top ten holdings are American Express, Microsoft and Oracle. It is on a discount to NAV of 7.

A potential portfolio of stocks with wide moats The third alternative is to build your own portfolio of businesses with wide moats. Let us assume that an investor wants reasonable diversification through stakes in between ten and fifteen such companies from different sectors and wants to include some stocks paying dividends. All these companies except Alphabet and Amazon pay dividends.

Industrials and Healthcare round out the top three. Looking at individual holdings, Kellogg Co K accounts for about 3. The top 10 holdings account for about The Morningstar Wide Moat Focus Index tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages. Story continues The ETF has lost about The ETF has a beta of 1.

With about 51 holdings, it effectively diversifies company-specific risk. Investors might also want to consider some other ETF options in the space. IVV has an expense ratio of 0. Bottom-Line An increasingly popular option among retail and institutional investors, passively managed ETFs offer low costs, transparency, flexibility, and tax efficiency; they are also excellent vehicles for long term investors.

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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But moats are not always so easy to see. This is quite true with firms you may not know as well. If you are looking to find stocks with wide moats, looking at past stock performance and financial statements can help.

While you are taking a closer look, keep an eye out for certain signals that can show a firm's strength. Earnings Performance During Bad Economic Times See whether the company still seems to be doing well, even when the broad economy is not.

That may show that there is something about its business plan that allows it to keep going in tough times. Cash on Hand Many companies make a choice to keep a lot of cash rather than reinvest it or pay dividends. Some may argue that a company should spend its cash or give it back to investors. Keep in mind, though, that having lots of cash on hand will provide a strong cushion if revenues don't meet expectations. Revenues and Profits as Compared to Competitors First, seek out the company's key competitors, and then compare their revenues and profits to the company you're looking at.

If there's a big gap between your company's earnings and those of firms it competes against, you can say that the more profitable one probably has a wide moat. Dominance of a Single Product Apple is said to have a wide moat, because sales of its iPhone far outpace those of any other smartphone business. Intel has led the semiconductor industry for years, because its chips are commonly used by most computer makers.

The popularity of these products gives their makers a wide moat, protecting them against the competition. They may even protect them against potential failure of their other products. Powerful Intellectual Property Often, one company may have a unique patent on a product or technology that other firms have little choice but to use.

This advantage can be a powerful driver of revenues that competitors can't match. Name Recognition Is the company practically synonymous with the industry? Do people use its product or services simply because they are recognizable and have been around for a long time?

Sometimes, simply having a long, reliable presence in the marketplace can give a company a strong advantage. The Bottom Line A company with a wide moat is likely worth investing in. It is often profitable in both good times and bad, and it can bounce back after bad news. It's likely also dominant in its field. Knowing where to find firms with wide moats and how to invest in their stocks can be a key part of building a strong portfolio.

This term refers to a company's competitive advantage and how sustainable that advantage is. A company with a wide economic moat has competitive advantages that could be expected to last more than 20 years, while a narrow economic moat might only give a company advantages for 10 years. Other companies don't have any moat and thus are vulnerable to competitors.

How do you identify the economic moat of a company? None of the products listed on this Web site is available to US citizens. Any services described are not aimed at US citizens. Reference is also made to the definition of Regulation S in the U. Securities Act of Attention: The data or material on this Web site is not directed at and is not intended for US persons.

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The Damage Done One major reason is pictured above. History tells us what out-of-control government spending does. Consumer prices have risen Inflation was only at 1. But there are enough similarities that we should be wary. They include high government debt, even higher inflation, and weakening economies. Sound familiar? Investors caught off guard today will pay a heavy price. Many already have. Many of these companies have not only paid — but increased — their annual dividends for 25 years or more.

One of our favorite stocks today is Realty Income O. US persons are: United States residents residents of other countries who are temporarily present in the United States any partnership, corporation, or entity organised or existing under the laws of the United States of America or of any state, territory, or possession thereof, any estate or trust which is subject to United States tax regulations For further information we refer to the definition of Regulation S of the U.

The data or material on this Web site is not an offer to provide, or a solicitation of any offer to buy or sell products or services in the United States of America. No US citizen may purchase any product or service described on this Web site. Special information for private individuals 1. Suitability of investing in the fund The product information provided on the Web site may refer to products that may not be appropriate to you as a potential investor and may therefore be unsuitable.

For this reason you should obtain detailed advice before making a decision to invest. Under no circumstances should you make your investment decision on the basis of the information provided here. As such, it can be assumed that you have enough experience, knowledge and specialist expertise with regard to investing in financial instruments and can appropriately assess the associated risks.

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