Warren Buffet's Wide Moat Principles: Applying Them to Your Investor Relations Messaging

Warren Buffet has stated that he seeks “economic castles protected by unbreachable ‘moats.’”  The principles of Buffet’s thinking increasingly guide many investors, both big and small.  Investors look for “good businesses” that are inherently good stocks.  Morningstar has even created an Index applying the five principles of Buffet’s “wide moat” theory.  Not surprisingly, it has significantly outperformed its comparable indexes.

Rarely does a company, particularly a small public company, align with all of the five wide moat principles.  But inevitably some of them apply to any decent business, and from an investor relations standpoint, these attributes must be clear to investors:

The network effect: when a service becomes increasingly more valuable as more customers begin using it.
This is the most difficult of the principles to get one’s arms around.  Essentially, it means that each new customer adds to the value of the business.  Think media: each new customer means that more can be charged in advertising.  So while it certainly does not apply to every company specifically, it speaks to the incremental value of new customers.  Public companies should communicate new customer wins when possible, but should also put the new customer win in broader context.  For example, are new customer wins in a sector begetting a faster new customer win rate?  Is the new customer in a new industry sector that adds expertise and capabilities?

A situation when consumers have no incentive to embrace the competition.
This is frequently the territory of very large public companies, but aspects of this principle can apply to smaller companies that have a distinct competitive advantage over competition.  Many companies won’t acknowledge or directly mention competition.  This may be a lost opportunity.  Including a capabilities table versus competition in your corporate slide deck can be a very effective tool for helping investors appreciate your dominant capabilities in a sector.  A company can also disclose customer retention metrics such as length of customer relationship and low churn, as well as the unattractive switching costs in the business.

A company possesses a virtual monopoly or control of a limited market.
Small to medium sized companies can, at times, have staggering and defensible market shares in very niche markets.  Take this into account when presenting market data.Demonstrate not only your small share of the overall market, but your bigger share in the niche markets that you focus on.  

Registered brands, patents and licenses that give a company steady cash flow.
Brands are of considerable value to investors.  Communicate the value of your growing brand both through anecdotal stories and consumer survey metrics.  This principle  also touches upon a company’s ability to “make money while they sleep.”  Licensing revenue can be high margin incremental revenue and should be broken out in a separate line item and clearly articulated.

A pricing advantage where you can produce a better quality product at a lower cost than the competition.
Good companies are constantly improving their manufacturing process.  Speak to your manufacturing efficiencies.  Host site visits for investors.  Share metrics demonstrating manufacturing improvements and quality.  Investors need to know that the company is able to produce excellent products at a good price; otherwise, the returns on the business will never be attractive.

John Nesbett, President, IMS