Economic Moat Mentality
What is economic moat mentality? Warren Buffett describes an economic moat as a distinct advantage that a company has over its competitors, allowing the company to protect its market share and profitability. The advantage is often difficult to mimic or duplicate (brand identity, patents, etc.) and thus creates an effective barrier against competition from other firms.
Two great examples of a powerful economic moat are the companies Apple and CP Rail; Apple has brand power and patents, and CP Rail owns the rail line denying any others from having access to the rail line.
Here is a rubric that someone might use when evaluating an economic moat from the stock market. When assessing a stock, someone would look at:
- The previous 10-year history
- The company’s ranking vs. other companies (compare revenue, market cap, net earnings)
- The product is changeless
- Its durable competitive advantage is idiot proof
- The stock chart confirms the consistency
- I read and understood the 10 years of annual reports
- The company is historically consistent
- Cash flow is good and growing, or I know why it is not growing and why it is just a short-term problem
So how do we apply this mentality to the real estate market? Economic moat mentality is a very important tool when buying or selling real estate as it helps in evaluating the long-term property values and rents. Let’s evaluate the economic moat mentality of the real estate market through the eyes of someone assessing a stock.
The previous 10-year history: The previous 10-year history of a stock is crucial to review as is the history of the real estate market whether you are buying are selling. What stage is the market in of the real estate cycle? Is it in the boom, slump, or recovery stage?
The company’s ranking vs. other companies (compare revenue, market cap, net earnings): How does the city or neighborhood compare to others? Are the school rankings good or bad when comparing to others? The outcome of these questions helps to determine property and rent values.
The product is changeless: In real estate, one could use the word timeless. Yesterday, today, and tomorrow, the city or neighborhood will remain as one of the best around. When I think of this, iconic areas like Kitsilano in Vancouver come to mind. However, not all iconic areas stay timeless. Take Robson Street in Vancouver for example—the once iconic shopping district has recently lost its charm and many stores are sitting vacant at the moment. All of this being said, make sure you do your research.
Its durable competitive advantage is idiot-proof: Beach Avenue in Vancouver is an idiot-proof street to own real estate on. With views to the southwest overlooking False Creek, Sunset Beach Park, and English Bay, it would be silly to pass up an opportunity on owning in this postal code.
The stock chart confirms the consistency, and I read and understood the 10 years of annual reports: Consistency is the key in long-term real estate market investment growth. Investors should avoid or be cautious when buying or owning property in boom/bust markets. One-horse towns that are dependent on one or two key industries will have times when they struggle; therefore, if they struggle, so will the real estate market. Oil and gas industry communities are great examples of this. When the industry goes up or down, the real estate market matches those ups and downs.
Cash flow is good and growing, or I know why it is not growing and why it is just a short-term problem: This point is important for any business. No cash flow = no reason to be in business. Countries, states, municipalities, and towns need cash flow to maintain, grow, and flourish. Any area or city that is flourishing means that cash is flowing; therefore, it is a place you want to be as a homeowner or investor. These areas or cities are easy to spot—spend a day or two shopping, walking about, and just being a tourist and you will quickly pick up on the cash flow and growth of the area. However, from time to time, even the strongest real estate areas may have a slowdown. Dig into the data and find out why the area is having a slowdown. Is it long-term or short-term?
Investors and homeowners need to have an economic moat mentality when it comes to buying or selling real estate. By applying the mentality, it gives us a distinct advantage in our long and short-term real estate holds and protects our market share and profitability.
Please reach out to our team for more information or help with all your real estate needs.
Randy Dyck
Personal Real Estate Corporation
604-807-4366 or randy@eximus.com
** Originally published on Eximus.com
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