One of the ways to find success in investing is to buy companies with a economic moat. What is an economic moat?

In an article by Jason Del Vicario and Steven Chen of Hillside Wealth IA, Warren Buffett of Berkshire Hathaway explained capitalism is all about somebody coming and trying to take the castle. A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable.

At the same time, Mr. Buffett acknowledged the difficulty of gauging how big the moat is. No formula in finance tells you the moat is 28 feet wide and 16 feet deep, it drives the academics crazy.

An example of a moat is Microsoft’s Operating System or OS. It has a 75% market share. It is always possible to buy another operating system, but people would have to learn it and that is the issue.

When it comes to finding a durable moat, look for the obvious signs to begin with 1) consistent market dominance; 2) consistent market share gains; 3) consistent superiority in business financials (e.g. profitability, return on capital, per employee revenue, maintenance capital intensity).

Notice the word consistent, you are looking towards the future.

Looking back tells us about the past, but not necessarily about the future. note Warren Buffett owns the Buffalo Evening News, then the internet came along. Kodak had a great moat, then digital cameras in smartphones came along.

Traditional textbooks discuss brand, scale, intellectual property and network effect. Along with customer, supplier, competitor, regulator and corporate culture.

Linking to dividend paying stocks, a company with a moat is music to the ears of dividend investors because the company should be profitable to pay dividends for a number of years. If they can do that, then the monitoring is to ensure the margins of the company are being maintained and the company is profitable. If yes, then only regular monitoring has to be done, if something has changed then the process to look for alternatives begins. It is important not to expect just because a company has a moat, you can hold on forever, homework never ends.

There are more questions than answers, till the next time – to raising questions.