In 2014, on a scouting trip to Europe, I visited Chateau de la Bussiere.
Located on a key route in the Loire Valley, this 12th century castle was well-fortified by a Gallo-Roman pond and moat. Protected, not only for political reasons, but economic too.
Historically, the chateau protected part of the path connecting Paris to the Mediterranean basin. A key trade route. Merchants had to agree to pay a tax to owner Lord Etienne de Fens to continue their journey or access the market square.
By the time we visited, some 800 years later, things had changed.
The entry fee was to visit and enjoy a tour given by Laure — daughter of Henri de Chasseval — whose family acquired the property after the French Revolution.
Chateau de la Bussiere. Source: Charter Barge France / Pierre Marceau
One of the striking aspects of this chateau is how well-protected it is from its surroundings.
The large pond behind it creates a formidable barrier.
Then there is a wide moat at the front to enter.
Moat in investing
At home, I have a small magnet of on a board outside my bedroom of Chateau de la Bussiere.
It reminds me of one of the most crucial lessons in investing.
If you seek wealth protection, what you invest in will protect its value far more if it possesses ‘moat’.
Often, such investment will also be able to reap profits at higher margins.
A very simple concept, but most listed businesses on the stock market don’t have much moat at all. And whatever moats there are — these can soon be eroded by regulation or changing market forces.
When we moved to live in Jersey in 2015, the idea of a moat became even more interesting.
Jersey is a small island in the English Channel. Its housing market is more expensive than London.
For a small 2-bedroom apartment, you can easily part with £500,000. And that is assuming you can get a licence to live, work, and buy or rent property on the island.
Yet, within just over an hour on the ferry and a short drive, you can find large properties in Northern France for less than half of this. And the food and wine is many times better.
But Jersey has a remarkable moat which keeps values high and ensures perennial demand from wealthy outsiders — and financial or legal worker-bees to serve them.
The island has no inheritance tax. No capital gains tax. Very low income tax. And for many, no corporation tax.
It is seen as a safe haven to hold one’s wealth from the ravages of greedy governments, volatile economies, thirsty families, and extortionate ex-wives.
As a repository for wealth, Jersey has a high degree of moat as a self-governing territory. Its island position, much closer to France than the UK, also reinforces this position.
So, if a moat keeps values highs and protects wealth, how do you find this in investing?
Finding moat in market-listed businesses
As you know, there’s sole provider or limited provider status.
Auckland International Airport [NZX:AIA] has the only international airport in this city.
Genesis Energy [NZX:GNE] is one of only a handful of large-scale power generators. Though alternative sources are emerging.
Businesses like these tend to be fully priced. And can be subject to regulation. Limiting margins and profits.
You could do well by finding moats that others overlook.
Certain listed property companies sometimes have properties in their portfolios that are essential to certain areas. These can be identified by analysing the property portfolios of REITs that show good occupancy and long leases.
Large pharmaceutical businesses can be complex to analyse. Yet looking at blockbuster drug sales and remaining patent length has helped to uncover some gems.
Then there’s the most overlooked area: size of customer base.
I’ve had a few eyebrows raised when I talk about our investment into easyJet [LSE:EZJ]. On the surface, it seems a high-risk, low-cost European-centred airline, smashed by the pandemic.
Underneath, it has a business model and level of brand recognition. Even during Covid-19’s worst year (2020), it flew 48 million passengers.
Meanwhile, the business shows £44 billion of liquidity to help it capitalise on opportunities following the pandemic.
Those 48 million passengers give this airline a ‘utility-like’ quality, holding up a degree of moat.
Of course, the airline sector remains risky. Hence the lower share price.
The bottom line
Moats protect wealth in investing, just as they did chateaus and castles in times long gone.
When it comes to assessing opportunity, the degree of moat is something I start with.
If a business has no or little moat, you then need to look at how they protect themselves from competition:
- Key locations.
- Large customer bases.
- Crucial patents and technology.
These can all help and provide hidden value during market cycles.
There’s an even more crucial moat. That is, protecting the quality of your own thinking.
A fearful mind is one with no moat. Open to all sorts of attacks and hence reactive, poor decisions. Guarding your thoughts and where they go is crucial in investing. And life.
To find coverage of more listed businesses with real moat, I encourage you to check out our Premium News programme today — Quantum Wealth Report.
Regards,
Simon Angelo
Editor, Wealth Morning
Important disclosures
Simon Angelo owns shares in Auckland International Airport [NZX:AIA], Genesis Energy [NZX:GNE], and easyJet [LSE:EZJ] via portfolio manager Vistafolio.
(This article is general in nature and should not be construed as any financial or investment advice. To obtain guidance for your specific situation, please seek independent financial advice.)