Pay Attention When Buffett Speaks About Economic Moats

At one point, Warren Buffett said, “In business, I look for economic castles protected by unbreachable moats.” He uses the castle as his metaphor for representing the company. The moat itself is representative of a strong competitive advantage. It makes sense that a wider moat will provide much more protection over the long term. The billionaire investor has presented the world a tremendous amount of wisdom through the years, but this specific piece of insight is more poignant now than at any time in history.

When it comes to profits, corporate America is a battlefield. It has an endless supply of warriors that are all working toward breaching your moat in an effort to gain their own profits. In 2007, during one of Warren Buffett’s letters to shareholders, he explains, “A truly great business must have an enduring mode that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business castle that is earning high returns.”

A company with a recognized name and a worldwide brand possesses a wide moat. Taking a look at variables such as branded earnings, brand contribution and financial value, the top 100 valuable brands across the globe grew their net worth by 7% to $2.6 trillion in the past year. All of these companies did this with 11 of the 13 categories posting year-over-year growth according to BrandZ.

Most notably, the most valuable brands had a stock performance that outperformed the broader market by a wide margin. It shouldn’t come as any surprise that Berkshire Hathaway owns a number of the names on this top 100 list.

If you have taken Buffett’s advice about powerful brands and economic moats over the years, then you should have experienced some very profitable outcomes.

Let’s face it…

Out of the 10 largest equity holdings owned by Buffett and Berkshire Hathaway, eight of them are in top 100 valuable brands and on the list.

Buffett believes in America and he is not shy about his bullish stance. While recently being interviewed on CNBC, Buffett said, “In terms of the economy, the luckiest person born in the history of the world is the baby being born in the United States.” Thinking about that for a moment, it’s quite fitting to realize that more than half of the top 100 brands are companies based in North America. They also account for roughly 2/3 of the $2.6 trillion brought in by the top 100 brands.

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