The following video is part of our "Motley Fool Conversations" series, in which analyst John Reeves and advisor David Meier discuss topics across the investing world.
Having a wide moat is associated with a company possessing a competitive advantage. David defines competitive advantage as the combination of a unique position, and the right supporting capabilities. Position is where a firm competes. Coca-Cola decided to build a brand-named drink company. eBay created a platform for buyers and sellers to come and make transactions. Denbury Resources has access to carbon dioxide deposits that no one else does.
On the capabilities side, Coke knows how to market its products very well. eBay understands how to manage and price its platform so it’s always working. And Denbury knows how to inject CO2 into old wells to produce oil. After looking at a firm’s positions and capabilities, investors have to determine if the advantage is sustainable. Here, we need to ask if imitation or substitution can harm the company. Sure, Pepsi is Coke’s rival, but Pepsi can’t kill Coke, and vice versa. What’s really interesting is when a company like Monster Beverage comes along with a completely new position -- the energy drink -- in the industry, and the capabilities to make it grow. Investing in wide-moat businesses is a favorite investing strategy at The Motley Fool, and these three simple steps should help you invest -- better.
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John Reeves has no positions in the stocks mentioned above. David Meier has no positions in the stocks mentioned. The Motley Fool owns shares of Denbury Resources, The Coca-Cola Company, and PepsiCo. Motley Fool newsletter services recommend eBay, Monster Beverage, PepsiCo, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.