WEBVTT 00:04.930 --> 00:10.960 The concept of the economic moët comes from Warren Buffett he evaluates a company's economic Moat's 00:10.960 --> 00:16.270 to determine its ability to maintain a competitive advantage over its rivals and thus protect its long 00:16.270 --> 00:18.890 term profitability and market share. 00:18.910 --> 00:25.630 So why do companies need a competitive advantage a competitive advantage as any quality that enables 00:25.630 --> 00:31.720 a company to offer similar products to its peers while enjoying superior financial performance over 00:31.720 --> 00:32.110 time. 00:32.110 --> 00:37.780 Companies are more likely to lose their competitive advantage because as they grow increasingly profitable 00:38.230 --> 00:43.590 competitors are more likely to replicate their methods or create even better ones. 00:43.720 --> 00:49.060 As soon as the level of a company's profits is significant enough to warrant attention it opens itself 00:49.060 --> 00:54.160 up to attack from competitors who are looking to enter the marketplace with the intention of grabbing 00:54.160 --> 00:57.600 a share of those profits for themselves. 00:57.610 --> 01:01.990 This is exactly where a wide economic mode offers the protective barrier. 01:01.990 --> 01:07.810 A business needs to prevent other companies from stealing its earnings or in other words establishing 01:07.810 --> 01:12.320 economic Moat's can help companies protect their long term profits. 01:14.760 --> 01:21.110 In reality an economic moat serves as a competitive advantage over other companies within the same industry. 01:21.300 --> 01:27.720 But what sets it apart is the fact that the advantage is sustainable over a very long period of time. 01:27.870 --> 01:33.300 While these modes can be created in a number of different ways it may be either narrow or significantly 01:33.300 --> 01:34.260 wide. 01:34.290 --> 01:39.750 It only stands to reason that the more of them a business can build the better off it will be. 01:39.750 --> 01:41.290 Let me ask you a quick question. 01:41.520 --> 01:46.830 How can you feel confident about estimating a company's ability to generate earnings down the road. 01:46.980 --> 01:53.410 If that ability is not protected in some way you know the sustainability is the key to consistent and 01:53.410 --> 01:58.830 ever growing revenues and the economic moat is the key to that sustainability. 01:59.770 --> 02:04.940 While having a competitive advantage may allow business to temporarily outperform its competitors. 02:05.110 --> 02:10.600 The economic moat is a benefit that's built to last and it will ultimately determine whether a company 02:10.600 --> 02:16.510 is set up for prolonged success or inevitable failure from an investment point of view. 02:16.530 --> 02:19.600 The longer companies economic moat can hold firm. 02:19.770 --> 02:25.530 The longer you will benefit from its profits it's important to be aware that there are some false business 02:25.530 --> 02:31.080 Moat's in the marketplace masquerading as the real thing and you should be careful not to be taken in 02:31.080 --> 02:38.200 by these impostors features like superior products outstanding marketing strategies and high performance 02:38.200 --> 02:44.770 management teams are all wonderful attributes for a business to have but on their own they are not enough 02:44.770 --> 02:47.380 to provide a long term competitive advantage. 02:48.200 --> 02:54.080 Products or marketing tactics can easily be copied and so require the presence of a deeper more durable 02:54.080 --> 02:58.080 barrier to support and protect them from would be thieves. 02:58.100 --> 03:03.530 So make sure that you'll only invest in companies with modes that generate superior shareholder returns 03:03.530 --> 03:09.590 over the long run and you should also be extremely selective and focused on wide moat stocks. 03:11.590 --> 03:16.900 Although economic modes tend to be more qualitative and quantitative in nature there are a number of 03:16.900 --> 03:23.080 ways you can recognize when a company has one or more in place a significant amount of cash flow and 03:23.080 --> 03:28.490 a strong operating performance are common to all businesses with an effective economic moat. 03:28.810 --> 03:33.910 But here are five other factors that play a vital role in the establishment of a sustainable competitive 03:33.910 --> 03:36.250 advantage in this module. 03:36.250 --> 03:38.140 We'll talk about cost advantage. 03:38.140 --> 03:45.760 Efficient scale intangible assets network effect and switching costs and how a company can utilize these 03:45.760 --> 03:51.070 wide modes to gain the upper hand over their competitors in the next video. 03:51.140 --> 03:55.120 We'll talk about the first one which is the cost advantage. 03:55.460 --> 03:57.120 OK see you in the next video.