All things equal, we'd choose a wide-moat company over one with a narrow-moat rating for the significant competitive advantages that should enable the wide-moat firm to earn more than its cost of capital for many years to come.
Most wide-moat companies have some sort of structural advantage versus competitors. By "structural," we mean a fundamental advantage in the company's business model that wouldn't go away even if the current management team did. With a structural advantage, a company isn't dependent on having a great management team to remain profitable. To paraphrase Peter Lynch, these are companies that could turn a profit even with a monkey running them, and it's a good thing, because at some point that may happen.
We hate to sound like a broken record here, but the four types of moats that we identified in the previous lesson are incredibly useful when thinking about structural advantages a company may or may not possess. Keep the four types of moats in mind:
- Low-Cost Producer or Economies of Scale
- High Switching Costs
- Network Effect
- Intangible Assets
Wide Moats Versus Deep Moats >>