Book Reviews
Book Review of : Why Moats Matter

Know specific competitive advantage to pick stocks better


Want to shortlist stocks for the long run? Look for companies that have moats, says Warren Buffett, the legendary investor. Moats refer to sustainable advantage that a company enjoys. It is not easy for a competitor to breach an impregnable fortress if it is protected by a moat of competitive advantage.

The book Why Moats Matter, authored by Heather Brilliant and Elizabeth Collins of Morningstar Investment Research, presents a guide to how an investor can pick ‘great’ businesses that have moats. A great business, as the authors mention, can fend off competition and earn high return on capital for several years, secure behind a moat.

In the first half of the book, the authors detail how they put the concept of moats, valuation and margin of safety into practice. In the second half, the authors provide a detailed guide, with examples, for analysing moats in eight different sectors such as basic materials, consumer products, energy, financial services, healthcare, etc, to name a few.

Competitive advantage can come from sources like intangible assets, cost, switching costs, network effect and efficient scale. Each of these sources is explained in great detail.

Intangible assets, such as brands, patents and government licences, can keep competitors at bay. The authors give one such example of Sanofi, a pharmaceutical company that benefits from patent protection that makes competing with it tough. Similarly, Walt Disney had built a moat around its brand in the entertainment business and Google in the search business.

Firms that enjoy economies of scale have a certain kind of moat around them—that of cost advantage. Railroads in America have enjoyed such competitive edge from their sustainable low-cost advantage compared to barges, ships, aircrafts and trucks.

Switching costs indicate the costs that a customer has to incur if she has to switch from one product to another. The higher the cost of switching, the more beneficial it is for the company. Citing Apple, as an example, the authors mention that there are a variety of switching costs around the iOS platform of Apple that allows the company to retain a good portion of its user base. Applications or media purchased from the iTunes store may not run on other devices that use a different operating system.

The value of a product increases as more and more users join and use the service; it makes a strong company become stronger. This moat is often sought to be created by social media and online e-commerce sites. The sheer numbers and a large interconnected community then becomes a moat.  
Expedia, an online travel agent, is one such example; due to its huge transaction volume, it is a highly coveted distribution channel. Travel suppliers are eager to list their service on its site. The larger the number of options, the larger is the number of consumers visiting the site, creating a virtuous cycle.

At the other end, there can be a market of limited size which can effectively be served by just one or a few companies. Pipelines, the authors mention, are the best example. Because these companies secure long-term contracts and there is little risk of disruption, the economic profits are sustainable.

Further, the authors explain how they give moat ratings. A low moat rating is given when a company is likely to benefit from competitive advantage and earn excess return for a period of at least 10 years. When the firm is expected to deliver excess returns for the next 10 years or more, it is given a higher moat rating.

Moats that seem unassailable in one period may disappear with technology or other changes. Once a top mobile handset manufacturer, Nokia, and hand-held gaming device manufacturer, Nintendo, have been swallowed up by their competitors. While they commanded a huge market share when they were new in the market, it wasn’t long before competitors came in and capitalised on that opportunity. While initially they had a ‘wide’ moat, as the competitors came in, the moat ‘narrowed down’.

There are plenty of investment books that focus on business fundamentals and valuation. This book tries to be different by adding how businesses with a competitive advantage can benefit. The book will give you a fundamental framework for long-term investing—how to identify a great business and when you should buy, to maximise return. Now, it’s your turn to find companies with moats in India and hold their stocks for the long term.



Kiran Aggarwal

3 years ago

Nice Coverage !!
Liked the Moat concept .

Actually we all think of such factors
buy it seems the author of the book helped the reader to actually provide tools to finally pick the stock as review suggests.

Fadnavis appoints BJP MLA accused in power theft as panel chief

BJP MLA Suresh Halwankar, who has been appointed as Chief of the one-member Textile Committee has a dodgy track record. He was disqualified by the governor as MLA in July 2014 after being convicted for power theft and sentenced for three years. He was able to contest elections after obtaining a stay from the High Court


Few days after Prime Minister Narendra Modi included a bank defaulter in his cabinet , Maharashtra chief minister Devendra Fadnavis has appointed an accused in power theft as chief of a one member panel.

Fadnavis has appointed Bharatiya Janata Party (BJP)'s member of legislative assembly (MLA) Suresh Halwankar as chief of the one-member Textile Committee. The MLA would be assisted by eight officials from the textile department.

Halwankar, who hails from Ichalkaranji, a textile-town in Kolhapur district, has been accused in a power theft case that caused a loss of about Rs21 lakh to state electricity board. The MLA owns a power loom factory in his hometown.  

The MLA and his brother were charged under sections 135 and 138 of the Electricity Act, after a flying squad raid revealed that the meter of the factory was running 45% slow, causing a loss of Rs20.97 lakh to the electricity board.

In May this year, Halwankar was convicted and sentenced to three years’ rigorous imprisonment and Rs10,000 fine. In his appeal before the Bombay High Court, the MLA had said his brother was taking care of the factory and he was not involved in the day-to-day functioning.  

The High Court, while admitting his appeal In July stayed Halwankar's conviction. However, before the HC stayed his conviction, the Governor had passed an order disqualifying him. Halwankar then moved another petition seeking that the Returning Officer be directed to accept his nomination form.

In September 2014, the bench of Justice Abhay Oka and Justice Girish Kulkarni refused to grant an interim relief to Halwankar and asked him to submit his nomination form to the Returning Officer for the Assembly elections.

Last month, Halwankar contested and won the election from Ichalkaranji.
The Textile Committee was formed by the previous Congress-Nationalist Congress Party (NCP) government and had representatives from textile institutions, business associations besides bureaucrats.

According to a report from the Times of India, the Fadnavis government avoided directly mentioning sacking of the previous committee in the notification issued on Thursday.


"The new committee has assigned the same tasks as the previous committee. Halwankar's committee can invite experts as per need, says the notification issued by RS Khadse, an official at the department of cooperation, marketing and textile," the report says.


Which sector should get priority in coal allocation

It is likely that, in ten days, to facilitate smooth running of the e-auction process, government may finalise the allocation priorities, to power sector, followed by steel, cement etc.


An inter-ministerial committee met on Tuesday to discuss the methodology to arrive at floor and reserve price for e-auction and the allocation of coal blocks, in line with the Supreme Court directive. It is likely that, over next 10 days, to facilitate smooth running of the e-auction process, government may finalise the allocation priorities, to power sector, followed by steel and cement. This process may be announced by 24th November.


As a first step, the Ministry of Coal will consider allocation of 42 coal blocks, which are already producing for both Central and State government undertakings; the balance 32 blocks which are almost ready will also come under the hammer and which would need new developers. Apart from various Secretaries involved in the Ministries,

representatives from Coal India Ltd (CIL) and Central Mine Planning and Design Institute will also form part of the Committee.


According to the press reports, Coal Secretary, Anil Swarup is reported to have stated that out of the 74 blocks, as many as 20 may be set aside or be reserved for allocation to state and government public sector undertakings. And these 20 blocks are currently said to be belonging to state government-owned companies. The balance 130 blocks (204-74) have had no activity so far and it is likely that they may not have made any attempt to complete the required formalities or got stuck at various points as non-starters.


Anil Swarup has further clarified that the government has no intention of making these blocks available, on gratis basis, even to state or central PSUs and they will also have to meet the reserve price based on valuation of property and the price of imported coal!

In the meantime, it may be recalled, that the Supreme Court had made the exemption in case of 12 blocks allotted to UMPPs and one each to NTPC and SAIL. So far, a great number of bidders are keen to participate to take the MDO (mine developer & operator), when NTPC calls for a bid to operate the Pakri-Barwadih captive coal block, said to have an estimated reserve of 504 million tonnes.


NTPC are the largest coal consumers in India, requiring an average 170 mt per year to operate their power generating plants. When the Pakri-Barwadih block is fully operational, it will reduce the supply bottleneck that they have faced on a regular basis.

Full details of the tender may be announced shortly.


Swarup is reported to have candidly said that while coal was available within the country, the problem actually relates to the evacuation of coal from pitheads. To overcome this issue, three railway lines are in process, one each in Odisha, Jharkhand and Chhattisgarh; these will be ready by 2019, and the earliest one to operate is likely to be the Odisha line that may be functional by 2017. The second issue covers the inadequate supply of rakes, which are currently about 200, and they expect to add 250 more in the next few years so that the coal movement becomes easier.


Railway tracks in our country are not extensively used in the night and optimum utilisation during the night for coal movement should be investigated as an alternative. Consumers should be encouraged to "opt and buy" their own rakes and make them available to Railways for transporting coal, if needed.


(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)


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