What Intangible Assets Make a Good Economic Moat?
In this post let’s look at how a company can create an economic moat with its intangible assets.
The possession of unique assets and other type of economic Moats can be created when a company invests in developing and building its own intangible assets.
Examples of such assets include things like patents, a strong and widely recognizable brand name, copyrighted intellectual property and specialized permits, or other kinds of government issued licenses.
These types of assets provide a natural economic moat for the company’s continued and profitable business operations.
Strong brand name recognition allows these types of companies to charge a premium for their products over other competitors products because they offer customers something that’s limited, exclusive or difficult to replicate.
As well as something that’s often known for having a predictable level of quality.
The perfect example might be Nike which started out as a simple athletic apparel company but has since become a major cultural institution and a purveyor not only of gear, but of status designer fashion labels.
Many fashion labels have similar business models using their prestige to sell clothing for prices several times higher than the cost of production.
This is really fantastic because it means that by utilizing their strong brand name they can make more money, for their money invested, than a company that does not possess such brand recognition.
It is why for example Under Armour which deploys a similar marketing strategy as Nike, sponsoring top athletes, still finds it difficult to compete because it does not have that strong BRAND, that Nike has. Adidas is another company that has that kind of brand that allows it’s clothing to be sold at a high mark up of what it costs to produce.
Not only does intangible assets help a company survive in the long run they also help prevent other competitors from duplicating the company’s products.
This is because they’re protected by copyrights and patents. As well as simply their brand name. The exact same piece of clothing sold by Under Armour cannot fetch the same price as it could if sold by Nike or Adidas. It just can’t because the brand name is not as good.
In addition I want you to take note of something else.
Popular brands aren’t always profitable brands.
If a brand doesn’t entice consumers to pay more, it may not create a competitive advantage.
That’s a red flag telling us that the management is not doing a good job to increase the business earnings and cash flow from an investors perspective. I would like to talk more about management of a company in another post because strong management is another great moat and technical advantage for a company.
Yet for now, know that a popular brand means nothing to me.
If it’s not profitable and if it doesn’t show any promise for future growth then it is not what we are looking for.
As an investor what we care about is how we can make a return on our investments. Period.
If a business is not profitable our investment won’t be profitable and will likely take additional risks of losing our money. And remember: Never lose money. Preservation of capital is valued higher than potential gains in an investment. If you lose your principle then you are out. So you must ensure that you are only investing in companies that are the lowest risk to your portfolio and present substantial gains.
So make sure you pick your stock wisely.
In summary you should look for companies that are protected by the advantage of a premium brand name, a tightly licensed product, a loyal customer base and an/or an industry with extremely regulated and complex injury requirements.
And you also want to make sure the company’s management knows how to utilize these intangible assets. Because if the management can’t play to the companies advantage it can be the one factor that ruins an investment over all others, in my opinion.