Identifying Moats

The Key To Long Term Stocks…

Written by:

Matt Allen

A passion for helping the average person led Matt to start his newsletter, The Common Capitalist, which is a newsletter that focuses on helping the average investor better understand finance.

View creator

23f630f0-2211-48b6-9fce-10b9797bb72f_2560x1919

Identifying Moats

The Key To Long Term Stocks…

This installment of The Matt Allen Letter is free for everyone. If you would like to read about stock analysis, stock market analysis, and much more.

Dear Friends,

I have studied Warren Buffett since I was in high school. I have always been fascinated with his thinking and I still turn to him on a regular basis. Warren Buffett and Peter Lynch have had a profound impact on my investing strategy, and I would like to discuss some of these things below.

I believe that anyone can make money in the stock market, if they focus on doing these things. Warren Buffett preaches to buy a stock within your circle of competence.

(Keep in mind, when you buy a stock, you are buying a company. You become an owner of this company.)

The first thing that I do when looking at a stock is figure out if I actually understand the company.

And when I say understand the company, I mean understand what the stock does, how the stock makes money, and what is the forecast for this company down the road.

Most importantly, I need to know how to value this company. As most of you know, I have a very good understanding of technology companies, and I have a really good understanding of Geo-Politics. I can find companies from these two sectors very easily compared to the rest.

I was horrible at my science classes in high school, I was even worse at my science classes in college, when I decided to show up. (Hopefully my parents miss that part)

Fun fact: Remember when I said that I have a very good understanding of Geo-Politics? In college, my buddy and I decided to take a Geography science class. We thought that we were taking a science class based on maps. Come to find out, geography the science has absolutely nothing to do with finding cities on a map. (Shoutout Stetson Godwin)

With that being said about my history with science, I do not mess around in the Pharmaceutical Sector. I do not understand how much Moderna should be selling their vaccines for. I do not understand how Pfizer can go about pricing their medicine. I simply do not understand this industry and that is completely okay.

When you are trading stocks in the short term and are using technical analysis, you love looking for a catalyst. A catalyst is an event that drastically impacts the stock price. For example, if the price of bitcoin goes up, the price of bitcoin mining stocks go up. If the price of oil goes up, the price of gas will go up.

When you invest in a stock for the long term and are using fundamental analysis, you are looking for a company that has a durable competitive advantage aka a moat.

Think about a castle real quick. We want a business that has a long durable competitive advantage (moat) that is wide and protects a cash flow machine castle (company.) We want this moat to be very hard for another company to destroy. You want to invest in companies that will continue to grow for a very long time in the future.

There are 5 Moats that I will quickly breakdown in a very simple way:

1. Brand Moat

A brand moat is a company that has a product or service that you think about when you need that product or service.

For example, when you search for something on the internet, you “google it.” You don’t tell your friends, “Hey, let me go yahoo that.”

When you need a new phone, you say: “I need a new iPhone.”

When you go to a theme park, you say “I am going to Disney.”

2. Price Moat

This is a very hard to moat to get and to keep. However, if you can sustain this moat you will do great in the long term.

A price moat is when a company can keep such low prices that other companies cannot compete with you.

For example, Geico insurance is known as some of the cheapest insurance because they have no middle man. Lemonade Insurance is a tech-insurance company that is working on this.

Costco is a very popular example of a company with a Price Moat. Why do you travel 30 minutes to go shop at Costco? The price of the products are very cheap compared to other stores.

Any moron can open a business and charge a low price for a product. The catch? You want a company that charges low prices because their cost is so cheap.

3. Secrets Moat

This is a pretty obvious moat, these are companies that have patents or trade-secrets.

If a company has a patent on a product, it is illegal for you to compete with them.

For example, if a pharmaceutical company patents a drug, it is illegal to sell that drug unless you are the company with a patent.

4. Toll Bridge Moat

The most common toll bridge moat is a company that has a massive long term deal with the government. A utility company is very common example of this type. PGE in California has been a complete disaster, but they are still around because California has no choice.

Palintir is a tech company that has massive long term deals with the government.

I personally believe that algorithms are a toll bridge moat. For example, the Instagram algorithm is pretty dang valuable.

5. Switching Moat

Switching moat is when it is to inconvenient to switch from one company to another. For example, your dentist would be a great example of this. Another example of this would be your bank.

In tech, even if yahoo search pops up, I still type in “google.com”

Keep in mind, the company only needs 1 of these things. Most importantly, the company has to be in your circle of competence to pick them out.

In conclusion, ask yourself, can some idiot with a Billion dollars destroy this company. For example, if you gave me $1 Billion dollars and told me to go make a better soft drink then Coca-Cola and beat their company. I wouldn’t have a prayer.

If you have any questions, feedback, or just wanna say hey, email me at mattallenletter@gmail.com

P.S. Follow along on Instagram, TikTok and Twitter for more recommendations, inspiration, and giveaways.

Stay Gritty,

Matt Allen

DISCLAIMER:

Conversation

No comments

0 Comments

Inline Feedbacks

View all comments

Disclaimer:The publisher does not guarantee the accuracy or completeness of the information provided in this page. All statements and expressions herein are the sole opinion of the author or paid advertiser.

Grit Capital Corporation is a publisher of financial information, not an investment advisor. We do not provide personalized or individualized investment advice or information that is tailored to the needs of any particular recipient.

THE INFORMATION CONTAINED ON THIS WEBSITE IS NOT AND SHOULD NOT BE CONSTRUED AS INVESTMENT ADVICE, AND DOES NOT PURPORT TO BE AND DOES NOT EXPRESS ANY OPINION AS TO THE PRICE AT WHICH THE SECURITIES OF ANY COMPANY MAY TRADE AT ANY TIME. THE INFORMATION AND OPINIONS PROVIDED HEREIN SHOULD NOT BE TAKEN AS SPECIFIC ADVICE ON THE MERITS OF ANY INVESTMENT DECISION. INVESTORS SHOULD MAKE THEIR OWN INVESTIGATION AND DECISIONS REGARDING THE PROSPECTS OF ANY COMPANY DISCUSSED HEREIN BASED ON SUCH INVESTORS’ OWN REVIEW OF PUBLICLY AVAILABLE INFORMATION AND SHOULD NOT RELY ON THE INFORMATION CONTAINED HEREIN.

No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned.

Any projections, market outlooks or estimates herein are forward looking statements and are inherently unreliable. They are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur. Other events that were not taken into account may occur and may significantly affect the returns or performance of the securities discussed herein. The information provided herein is based on matters as they exist as of the date of preparation and not as of any future date, and the publisher undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional material.

The publisher, its affiliates, and clients of the a publisher or its affiliates may currently have long or short positions in the securities of the companies mentioned herein, or may have such a position in the future (and therefore may profit from fluctuations in the trading price of the securities). To the extent such persons do have such positions, there is no guarantee that such persons will maintain such positions.

Neither the publisher nor any of its affiliates accepts any liability whatsoever for any direct or consequential loss howsoever arising, directly or indirectly, from any use of the information contained herein.

By using the Site or any affiliated social media account, you are indicating your consent and agreement to this disclaimer and our terms of use. Unauthorized reproduction of this newsletter or its contents by photocopy, facsimile or any other means is illegal and punishable by law.

For Full Terms of Use Click HERE. For the Privacy Policy Click HERE.

Gritcapital.substack.com (“Grit”) is a website owned and operated by Substack. Grit is paid fees by the companies that make investment offerings on this website. Be aware that payment of these fees may put Grit in a conflict of interest with the investor. By accessing this website or any page thereof, you agree to be bound by the Terms of Use and Privacy Policy, in effect at the time you access this website or any page thereof. The Terms of Use and Privacy Policy may be amended from time to time. Nothing on this website shall constitute an offer to sell, or a solicitation of an offer to buy or subscribe for, any securities to any person in any jurisdiction where such an offer or solicitation is against the law or to anyone to whom it is unlawful to make such offer or solicitation. Grit is not an underwriter, broker-dealer, Title III crowdfunding portal or a valuation service and does not engage in any activities requiring any such registration. Grit does not provide advice on investments or structure transactions. Offerings made under Regulation A under the U.S. Securities Act of 1933, as amended (the “Securities Act”) are available to U.S. investors who are “accredited investors” as defined by Rule 501 of Regulation D under the Securities Act well as non-accredited investors, who are subject to certain investment limitations as set forth in Regulation A under the Securities Act. In order to invest in Regulation A offerings, investors may be asked to fill out a certification and provide necessary documentation as proof of your income and/or net worth to verify that you are qualified to invest in offerings posted on this website. All securities listed on this site are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Grit does not verify the adequacy, accuracy or completeness of any information. Neither Grit nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy, valuations of securities or completeness of any information on this site or the use of information on this site. Neither Grit nor any of its directors, officers, employees, representatives, affiliates or agents shall have any liability whatsoever arising from any error or incompleteness of fact, or lack of care in the preparation of, any of the materials posted on this website. Investing in securities, especially those issued by start-up companies, involves substantial risk. investors should be able to bear the loss of their entire investment and should make their own determination of whether or not to make any investment based on their own independent evaluation and analysis.