3 Tips to find a company with a moat 

Moat investing is a term coined by Warren Buffett.

It’s perhaps his secret sauce to investing.

Consider his encounter with Larson-Jhul.

Back in 2001, Warren Buffett was researching Larson-Jhul, a custom picture frame company. He had never heard of the company before. 

But within 15 minutes, he’d decided to invest in it. 

That’s right. 

You might be wondering, “how come Buffett only spent 15 minutes making?” 

The answer is moat.

Larson-Jhul had such a wide moat that it became an irresistible investment. So if you want to become successful at investing, you have to find your own company with a wide moat.

But how do you find a company with a wide moat? How do you find your own Larson-Jhul?

Here are three tips:

1. Find Companies That Do Something Valuable, Rare, and Difficult to Imitate 

Jay Barney was a business professor at the University of Utah. No one really knew who he was except for his students. But one day things changed.

He published a research paper called “Firm Resources and Sustained Competitive Advantage.” The paper explained how someone could identify if a company had a sustainable competitive advantage by asking themselves three simple questions

1. Does the company do something valuable for consumers?

2. Is it rare to find a business that can provide value in this way for consumers?

3. Is it difficult for a competitor to imitate its business model? 

The business world fell all over those three questions. Barney went on to become the most-cited professor at his university, and he even became one of “the most-cited strategic management scholars in the world,” according to the Lassonde Entrepreneurship Institute. 

Today, his three questions are taught at every business school (Harvard, Yale, and Wharton) to students who want to know how to identify a company with a competitive advantage. 

Amazon is an example of a company that does something valuable, rare, and difficult to imitate. 

First, Amazon does something more valuable than the competition. It offers free 2-day shipping, low prices, and a vast selection of consumer products. Those are all things that the customer finds valuable. 

Second, Amazon does something that’s rare. It’s not common to find a company that can offer the same level of customer experience as Amazon. If anything, there isn’t a single company that offers as wide of a selection, as low prices, and as fast shipping as Amazon, not to mention the user-friendliness of its return policies. 

Third, Amazon does something that’s difficult to imitate. It’s almost impossible for a competitor to replicate Amazon’s customer experience. It’s almost impossible for anyone to offer free 2-day shipping at prices as cheap on as wide of a selection of products as Amazon does. So, it’s difficult to imitate its value proposition.

2. “If I Had A Billion Dollars, Could I Knock Them Off?” 

In 2008, Warren Buffett had an opportunity to purchase Mars, the candy company that sells Twix, Skittles, and M&Ms. It was a rare opportunity to buy one of the leading candy companies in the world. 

To decide if the company would thrive no matter what, Buffett put himself in the shoes of the competition and asked himself one question: “If I had a billion dollars, knock off Snickers as the leading chocolate brand?” 

The answer to that question was a clear “no.” 

Even if he was a competitor with more than a billion dollars in funding, he didn’t think he would be able to overthrow Snickers. 

He went onto buy the candy company for $6.5 billion, and he later told media outlets that his Mars investment was very profitable. 

One way to conclude if a company is really good enough is by putting yourself in the shoes of the competition and asking yourself, “could I knock off this business as the market leader if I had a billion dollars?” 

If you’re researching Google, ask yourself, “if I were running a competing search engine and had $1 billion, could I find a way to overthrow Google?” 

If you’re researching Netflix, ask yourself, “if I were running a competing streaming service and had $1 billion, could I find a way to overthrow Netflix?” 

If you’re researching Apple, ask yourself, “if I were running a competing phone company and had $1 billion, could I find a way to overthrow Apple?” 

If you aren’t confident that a company can withstand the competition, you shouldn’t invest in it. 

3. Spend Only 15 Minutes Researching a Company

Back in 2001, Warren Buffett was researching Larson-Jhul, that custom picture frame company. He was trying to decide whether to purchase the company. 

You would have expected Buffett to spend hours researching the company. He’d never even heard of Larson-Jhul before, so it would have required more time to do it. His calendar was empty, so he had all the time in the world to research the company. 

And it’s important to conduct thorough due diligence, right? 

Important to conduct thorough due diligence? 

It took Buffett 15 minutes from first hearing about the company to decide he was going to purchase it. “What prompted him to buy the company so quickly?” you may ask. 

Well, the truth is that it doesn’t take long to figure out if a company is a good company. As Buffett says, “If we can't make a decision in five minutes, we can't make it in five months.”

Take a look at these companies: Starbucks, Amazon, and Apple. 

Their huge competitive advantages are almost immediately apparent. 

It doesn’t take an hour to figure out that Starbucks has a strong brand. 

It doesn’t take a day to figure out that Amazon has excellent customer experience. 

It doesn’t take a week to figure out that Apple has a world-class product and an ecosystem that’s hard for users to ever leave. 

Only a few minutes. 

Here’s the other side of the time equation: if it’s taking anything longer than a few minutes for you to figure out whether a company has a competitive advantage, well, it probably doesn’t. 

I was once researching Nomad Foods, a British frozen foods company. I needed to figure out if the company was so good that no one could compete against it. I spent hours and hours researching. I read all of its most recent annual reports. I spent a lot of time searching different opinions of different investors. I even gave myself a whole week to think about the investment decision. But then it hit me. I didn’t have an answer yet, which meant that it probbaly didn’t have a strong moat.

Set a timer for 15 minutes. If it’s the timer it up and you haven’t figured out if the company has a moat, it probably doesn’t.

This article is an excerpt from Take Stock In This, which people say is the “best book on investing since The Intelligent Investor.” Click here to get a copy of the book today.