Trillionaire Term of the Day - February 26, 2009 - Economic Moat

Economic Moat

An economic moat refers to the long-term competitive advantage that one company has over other companies in the same industry. Just as a water moat would keep enemy soldiers from a castle, an economic moat keeps competitors from stealing profits from the industry-leading company. 

Clearly, the bigger economic moat a company has, the larger its competitive advantages are.  Economic moats could come in the form of a strong brand name, lower production costs, and many other factors that give a business the ability to maintain competitive advantages over competitors in order to protect long-term profits. 

Some of the biggest and most stable companies, such as Coca-Cola and Wal-Mart, are famous for their giant economic moats.  Because Wal-Mart has so many competitive advantages over its competitors, it is very hard for other retailers to compete directly with Wal-Mart. 

Warren Buffet actually made the concept of economic moats famous, and much of his long-term investing success is due to his ability to find companies with large economic moats and by taking advantage of the fact that these companies would stay safe from intense competition.  So, as a young investor, make it a point to find companies that you think have large economic moats, and try to find companies that perform a certain aspect of their businesses much better than the competitors in the same industry.  By doing this, you can ensure that the company you have invested in will continue to bring in large profits, and your investment will surely bring you profits as well.  

Niki Pezeshki

College Trillionaire