In two previous articles ('Supersize Your Profits', 13 May 2013, and 'Supersize Returns II', 27 February 2015), I profiled 15 US small-cap shares that I considered to be in possession of "economic moats" - a phrase coined by Warren Buffett to describe companies with durable competitive advantages. In this article, I look at five UK small-cap shares which I consider also possess economic moats and worth further research.
Determining whether or not you think a company is in possession of an economic moat is, as with any forward-looking assumption, an exercise in managing uncertainty. Even Mr Buffett misjudges a company's moat now and again, so mastery of the subject is elusive. Moats are much easier to determine in hindsight, but investing while looking in the rear-view mirror is not a sound strategy. The key, then, is to have a method for evaluating a company's potential for generating sustainably high returns over the next decade and beyond.
Why is this important? In most cases, investors naturally and quite reasonably assume that a company's recent success will diminish and revert to the mean in the coming years as competition intensifies. If your moat evaluation is indeed correct, however, and the company's high returns persist over a decade or more, there's a pretty good chance that other investors will need to readjust their assumptions upward.