What Mistake Are Smart Investors Making These Days?

Warren Buffett did the investor community a great favor by introducing the concept of an “economic moat” when explaining what types of businesses are so superior that they can be purchased and held passively for long periods of time and riches will subsequently abound. In his annual letters, Buffett has defined a moat as “the ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms.”

Often times, a strong brand name is the source of what gives a corporation an economic moat. But a laziness, or at least a false equivalency, has arisen in recent years in which the terms “commonly known brand name” has become interchangeable with the concept of an “economic moat.” An economic moat only exists when a business has a competitive advantage over it competitors which is usually either pricing power or an economy of scale that creates lower distribution costs.

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