How to Achieve Investing Success

The term “economic moat” is one which was coined and popularized by Warren Buffett. Like a moat around a traditional castle, the phrase refers to the ability of a business to defend its profits from its competitors, and where possible, expand its market share.

It follows that companies which are able to maintain their economic moat over the long term can often turn out to be long term winners in the share market too.

Having said that, we have to be mindful that business success will attract competition as surely as night follows day. As Foolish investors, we should think a couple of steps ahead on how a company can sustain its past success, and continue winning in the future.

To do that, we can think about economic moats along two dimensions – that is, the depth (how money can be made within its niche), and width (how long the economic moat can be sustained).

The depth

The depth of an economic moat refers to a company’s ability to make full use of its economic moat to gain financial benefits.

An example of this dimension can be observed at vehicle distributor Jardine Cycle & Carriage Limited (SGX: C07). You can read more about the company here. The company – through its Indonesian subsidiary, Astra International – has the largest network of production, distribution, retail and after-services of motorcycles within Indonesia.

As that network grows, Jardine C&C may gain operating leverage as well. In 2009, the company held a 46% market share in motorcycle distribution within Indonesia. Fast forward to 2013 and the company reported a 61% market share.

Its gain in market share in the five years has also brought about an increase in profits. The graph below shows the profits that Jardine C&C has been able to earn from its automotive business segment from 2009 to 2013.

image (2)

Source: Company Earnings Announcement

This growth in market share and profit shows that Jardine C&C has been hard at work growing the depth of its economic moat.

The width

In contrast, the width of an economic moat refers to the ability of a company to expand on its existing strengths and make it harder for competitors to penetrate into its business.

The recent efforts of diamond manufacturing equipment maker Sarine Technologies Ltd (SGX: U77) can be seen as an attempt to increase the width of its economic moat.

For Sarine, its current business revolves around its Galaxy inclusion mapping system which is supplied to the rough diamond market. Inclusions are a type of clarity characteristic that’s formed in a rough diamond when the stone is formed deep underground. As the presence of inclusions can dramatically reduce the value of a polished diamond, the detection of inclusions is very important for diamond manufacturers (the ones who polish rough diamonds into the gems we see in jewellery stores).

Meanwhile, two new products – namely Sarine Light and Sarine Loupe – will be targeted at the larger polished diamond retail market. This could bring new avenues of growth for Sarine and expand the sources of revenue for its business.

Although it is still too early to tell if Sarine’s new products are able to gain a foothold within the polished diamond retail market, the company’s efforts may pay off somewhere down the road.

Foolish take away

Investing in companies is a long term endeavour. Our duty as Foolish investors does not end when we click on the buy button and purchase shares of a company. We should keep up with the developments within the company and observe how it strengthens the depth and width of its economic moat. History has shown that the companies which are able to do so may provide their investors with satisfying long term returns.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.