Thanks to his incredible track record leading Berkshire Hathaway , Warren Buffett is a legend in the investing world. He's considered by many to be one of the greatest capital allocators ever. Because of this standing, average investors are always trying to emulate his strategy in the hopes of achieving strong returns.
If you want to start investing more like the Oracle of Omaha , I think there's one no-brainer action you should start taking right away that can have huge benefits.
Identify this trait before anything else
Retail investors, and surely many professional capital allocators, can copy Buffett by only focusing on owning businesses that have an economic moat . This is a single competitive advantage, or a combination of them, that has proven to be durable over an extended period. It allows a specific company to outcompete rivals and earn higher returns on invested capital .
If a business has a moat, it has a superior competitive standing in its industry. It also indicates the company in question is high-quality. There are a handful of different types of economic moats.
Apple and Walt Disney have invaluable intangible assets that are almost impossible to replicate. The iPhone maker is one of the world's most powerful brands. The House of Mouse owns intellectual property that it monetizes in various ways.
Visa and Airbnb have network effects working in their favor. The payments platform is valuable because of the huge number of cards in circulation and the number of merchant acceptance locations across the globe. The alternative accommodations site has 5 millionhosts and 8 million listings in 220 countries and regions, and it handled 125 million bookings in the second quarter. Both Visa and Airbnb attract users because they already have so many, which feeds on itself.
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Banks like JPMorgan Chase and Bank of America possess switching costs . As clients, from individual consumers to multinational corporations, use more products and services over time, it becomes more difficult for them to take their business elsewhere.
As the world's third biggest retailer, Costco has a cost advantage. It has unmatched buying power with its suppliers. This results in favorable pricing on merchandise, with savings passed to customers.
Another moat source comes from efficient scale. This is usually seen in industries with huge capital requirements, few competitors, and minimal growth potential. Think of utilities or railroads, for example.
You might realize that some elite companies are fortunate enough to have developed multiple economic moats. Besides its brand, Apple's ecosystem creates switching costs for users. In addition to network effects, Airbnb's brand is so highly regarded in the travel sector that it has become a verb.
Investing perspective
To be clear, the existence of a moat doesn't automatically mean a stock is a smart buy. Some moats are dying, while others are expanding and getting stronger. Figuring out which companies are in the latter camp requires more work.
There are other factors to consider before adding a business to your portfolio. Is the business generating healthy margins? Does it carry minimal debt? Is the management team skillful? Are there meaningful growth prospects? All of this matters when determining whether an enterprise is high-quality or not.
While there are many variables to consider when you make a decision, I think keeping your watch list full of businesses that possess economic moats is a fantastic way to improve as an investor. That's a good starting point to build on.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients have positions in Walt Disney. The Motley Fool has positions in and recommends Airbnb, Apple, Bank of America, Berkshire Hathaway, Costco Wholesale, JPMorgan Chase, Visa, and Walt Disney. The Motley Fool has a disclosure policy .
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