By VanEck via

Moat, a term first coined by Warren Buffett:

“In business, I look for economic castles protected by unbreachable moats.”

What is an economic moat?

A company’s ability to maintain competitive advantages and fend off its competition in order to protect its long-term profits and market share. Moat investing is based on a simple concept: invest in companies with sustainable competitive advantages trading at attractive valuations.

Morningstar turns the moat investing philosophy into an actionable investment strategy.

Morningstar has identified 5 sources of competitive advantages (or moats):

Switching costs: Whether in time or money, the expenses that a customer would incur to change from one producer/provider to another

Intangible assets: Brands, patents, and regulatory licenses that block competition and/or allow companies to charge more.

Network effect: When the value of a service grows as more people use a network

Cost advantage: Allows firms to sell at the same prices as competition and gather excess profit and/or have the option to undercut competition

Efficient scale: When a company serves a market limited in size, new competitors may not have an incentive to enter.

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