A moat is a deep, broad ditch, either dry or filled with water, that surrounds a castle other building or town, historically to provide it with a preliminary line of defence
What it has to do with investing ??
This term was used by Warren Buffet to select companies which has superior competitive advantage . The wider the moat, the larger and more sustainable the competitive advantage. By having a well-known brand name, pricing power and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against other companies wanting to enter into the industry
However it has been misunderstood by value investors .. Why ??
Not all companies having good moat are great investments . Often such companies are well known and well studied . They have superior profit margins and this is already reflected in their share prices and PE ratio. Probability of negative impact is high in case of surprises and new development either in regulation , technology or consumer preferences.
So what is the REAL MOAT for Investor ??
MARGIN of SAFETY or MOS . A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.
The term was popularized by Benjamin Graham (known as "the father of value investing") and his followers, most notably Warren Buffett. Margin of safety doesn't guarantee a successful investment, but it does provide room for error in an analyst's judgment. Determining a company's "true" worth (its intrinsic value) is highly subjective. Each investor has a different way of calculating intrinsic value which may or may not be correct. Plus, it's notoriously difficult to predict a company's earnings. Margin of safety provides a cushion against errors in calculation.
How large of a margin of safety is needed for a stock to be considered a true value investment. This depends on several factors, including general market conditions, risk tolerance, and even the fundamental prospects for the company in question. When an investor feels very confident that his/her inherent value figure is accurate and unlikely to fluctuate substantially, then a thinner margin of safety might be suitable. This is usually the case with well-established firms in mature industries with clear earnings visibility and stable profit & cash flow track records. Trying to pin an exact fair value on other companies, particularly younger ones operating in volatile industries, can be an exceedingly difficult task. In this case, prudent investors should generally demand a higher margin of safety to compensate for the uncertainties behind the calculation
Seth Klarman of Blaupost Group one of strong proponent of this concept says it is better to focus on stocks with plenty of tangibles (cash, property, inventory) rather than intangible assets such as goodwill, intellectual property. Klarman published an entire book devoted to the subject of margin of safety in 1991: Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor
. This 249 page tome is out of print and sells for upwards of $600
although downloadable scanned copies have inevitably found their way
onto the internet. Pl find some interesting reads on Margin of Safety . This will help you to become better investors
http://dividendmonk.com/margin-of-safety/
http://www.joshuakennon.com/margin-of-safety-the-secret-value-investing-strategy
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