Stock Investing: Find Economic Moats

Economic moats are a company’s competitive advantage in keeping competitors from hurting a company’s profit.

In a liquid capital market, capital will flow and seek opportunities with the highest expected returns. This is why a company operating in a profitable industry will become less and less profitable as more and more competitors enter the industry.

Companies with economic moats are able to enjoy above average levels of profitability for many years. Longer periods of excess profitability over its competitors will lead to better long-term stock performance.

Investment great Warren Buffet and Harvard professor Michael Porter were the first to establish many of the principles for analyzing competitive strategy and economic moats. Follow these 5 steps to analyze a company’s economic moats.

1. Evaluate the company’s historical profitability.
2. Identify the economic moats.
3. Estimate the life span of the economic moats.
4. Looking out for Red Flags.
5. Analyze the industry’s competitive structure.

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