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Supersize returns VI

Todd Wenning looks at the US markets to see how defensive moats can lead to bumper gains
Supersize returns VI

In the Middle Ages, moats were often used to protect castles from sieges. Moats could be dry or wet, and both types had distinct advantages and disadvantages. Wet moats offered better protection during an attack, but in peacetime the stagnant water could be a health hazard. The circumstances dictated the value of one type of moat over the other.

The same is true for economic moats. Although the phrase ‘economic moat’ has gained popularity in the past few years, it’s worth a brief review. Coined by Warren Buffett, an economic moat is a durable competitive advantage that enables a company to earn high returns on capital over a decade or longer. Without an economic moat, a company’s strong performance can be short-lived as competitors can quickly replicate its model.

Classic economic moat examples include Coca-Cola (US:KO) (brand advantage), Sage (SGE) (switching cost advantage), eBay (US:EBAY) (network effect) and Wal-Mart (US:WMT) (low-cost production).

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