Because it leads to investing success, that’s why! Companies with an economic advantage or “moat” around their business have an edge over their competitors that helps to protect their market share and profitability. Furthermore, companies exhibiting a “wide” economic moat are usually even more difficult to challenge or duplicate because their distinct advantage essentially creates an effective barrier to entry for other market participants, i.e., other competing companies.

What types of distinct advantages or barriers create these “wide” economic moats:

markets or businesses with exceptionally high start-up costs (think Intel and the cost of creating multiple semiconductor manufacturing facilities);
businesses utilizing scale advantages that lower operating costs (think Wal-Mart’s ability to pressure a supplier’s pricing versus a smaller retailer);
businesses with strong brand recognition (think Coke or Gucci); and/or
businesses with a strong patent portfolio (think Pharmaceutical Companies or Apple).

Companies that exhibit some of these advantages for Mr. Buffett include: Geico (due to their low operating costs), Coke (brand recognition), and Burlington Northern Santa Fe Railway (high start-up costs). The next time you are looking for a good stock, don’t forget to think about that company’s economic advantage or “moat.”

If you have question about whether or not a company seems to exhibit a “wide” economic moat, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

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