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Hundreds of years ago the medieval elite would dig moats around their castles to protect them from invading armies. Those lines of defence proved so powerful that the same approach to fortifying a hard won position is still effective today – just ask Warren Buffett. For the famous billionaire investor, companies that dig themselves economic moats have a major competitive advantage. And the wider and deeper those moats are, the better.
His annual letters to shareholders are packed with references to investments in high quality businesses that generate remarkable returns. These businesses may own highly desirable brands or hard-to-get regulatory approvals to market their products. Moats also exist when it is difficult or unappealing for a company’s customers to move elsewhere. Those customers may even feel at home or have strong connections to the services they are paying for. Its influential feedback system has earned it a huge base of users who trust the views of others to buy anything from handbags to cars. Companies with genuine economic moats also often have huge scale in their manufacturing or distribution networks.