The concept of the economic moët comes from Warren Buffett he evaluates a company's economic Moat's
to determine its ability to maintain a competitive advantage over its rivals and thus protect its long
term profitability and market share.
So why do companies need a competitive advantage a competitive advantage as any quality that enables
a company to offer similar products to its peers while enjoying superior financial performance over
time.
Companies are more likely to lose their competitive advantage because as they grow increasingly profitable
competitors are more likely to replicate their methods or create even better ones.
As soon as the level of a company's profits is significant enough to warrant attention it opens itself
up to attack from competitors who are looking to enter the marketplace with the intention of grabbing
a share of those profits for themselves.
This is exactly where a wide economic mode offers the protective barrier.
A business needs to prevent other companies from stealing its earnings or in other words establishing
economic Moat's can help companies protect their long term profits.
In reality an economic moat serves as a competitive advantage over other companies within the same industry.
But what sets it apart is the fact that the advantage is sustainable over a very long period of time.
While these modes can be created in a number of different ways it may be either narrow or significantly
wide.
It only stands to reason that the more of them a business can build the better off it will be.
Let me ask you a quick question.
How can you feel confident about estimating a company's ability to generate earnings down the road.
If that ability is not protected in some way you know the sustainability is the key to consistent and
ever growing revenues and the economic moat is the key to that sustainability.
While having a competitive advantage may allow business to temporarily outperform its competitors.
The economic moat is a benefit that's built to last and it will ultimately determine whether a company
is set up for prolonged success or inevitable failure from an investment point of view.
The longer companies economic moat can hold firm.
The longer you will benefit from its profits it's important to be aware that there are some false business
Moat's in the marketplace masquerading as the real thing and you should be careful not to be taken in
by these impostors features like superior products outstanding marketing strategies and high performance
management teams are all wonderful attributes for a business to have but on their own they are not enough
to provide a long term competitive advantage.
Products or marketing tactics can easily be copied and so require the presence of a deeper more durable
barrier to support and protect them from would be thieves.
So make sure that you'll only invest in companies with modes that generate superior shareholder returns
over the long run and you should also be extremely selective and focused on wide moat stocks.
Although economic modes tend to be more qualitative and quantitative in nature there are a number of
ways you can recognize when a company has one or more in place a significant amount of cash flow and
a strong operating performance are common to all businesses with an effective economic moat.
But here are five other factors that play a vital role in the establishment of a sustainable competitive
advantage in this module.
We'll talk about cost advantage.
Efficient scale intangible assets network effect and switching costs and how a company can utilize these
wide modes to gain the upper hand over their competitors in the next video.
We'll talk about the first one which is the cost advantage.
OK see you in the next video.