6 keys to finding companies with economic moat

1. Solid Identity
When investing in the stock market, identify companies with a solid identity. Differentiation of the company from the rest of the players in the marketplace is one way to spot a company with a solid economic moat. When stock-picking companies, identify companies with a distinctive and outstanding look, brand name or brand symbol because these products ensure the companies’ profitability, which makes your investment profitable as well. Examples of strong global brands who were able to give a strong brand identity are Coca-cola, McDonald’s, Mercedez Benz, Apple, and Google.

2. Exclusive Rights
Investing in a company with exclusive product right is always a good idea. A patent or copyright grants a company exclusive rights to manufacture and market products, which translates to a monopoly of the market for the duration of its patent or copyright, which is a considerable amount of time. This is indicative of a considerable economic moat, which makes it a good choice for investing because it ensures a profitable investment. When stock-picking companies, bear in mind that multinational pharmaceutical companies would have products with exclusive rights.

3. Looking to the future
A company with explicit long term strategy is a company that visualizes its growth and the strategies necessary to achieve it. It also plans for unforeseen circumstances that can hamper the company’s growth. When stock picking and making decisions on investing in a company, the company’s future directions accounts for additional economic moat.

4. Deterring customer switching
With the many choices available in the market today, switching products and services has become a common practice among customers. When the cost for switching is negligible, customers are more open to vary their product consumption. This is one thing to look into when stock-picking and investing. Companies and products with a higher cost for switching will have stronger economic moat. When switching is hampered by a high cost, product loyalty is assured, and high stock performance can be expected. Mac products for one, creates this scenario. Since you have to invest on software, which is exclusive for Mac products, the urge to switch is significantly curbed.

5. Big Capital
Products needing a high capital to develop, maintain, and improve also strengthens its economic moat. Companies with a high capital requirement guarantees limited competitors. When there are limited competitors, the customers will also have limited choices from where to source their products. Example of which are cable and telecommunications companies.

6. Low capital
On the other end of the spectrum, low cost of production produces products, which can be passed on the consumers at a lower and more competitive price, opening itself up to a broader consumer population. This increases the product’s economic moat and should be considered when stock-picking. Before investing though, you also need to analyze how varied the market is. In a varied market, a lower prize can also predispose frequent switching from customers.