What Does a Castle Have to do With Investing?

value dividend investing

Ever hear Warren Buffett talk about a castle and moat? Why does he look for companies with large moats? Mary Buffett in her book "The New Buffettology” describes the castle concept quite nicely:

“When explaining the concept of the competitive advantage, Warren (Buffett) likes to use the castle-and-moat analogy. Pretend that the business in question is a castle and the surrounding the castle is a protective moat we’ll call its competitive advantage. The competitive-advantage moat protects the castle from attack by other businesses, such as attempts to lure customers away.

It can be as simple as a brand name. If you want to eat a Taco Bell chalupa you have to go to Taco Bell. The same goes for that finger-lickin’-good fired chicken that KFC serves. You want expert tax advice, go to H&R Block. You want a Bud after work, you have to buy it from Budweiser. Wrigley’s controls the gum game. Coca-Cola makes America’s best-selling soft drink. Philip Morris makes Marlboro, America’s best-selling cigarette. If you want to buy any of these brand-name products or services, you have to buy them form the sole producer and no one else…..

These companies have a competitive advantage – a brand name or regional monopoly -  that enables the business producing the product or service to earn monopoly-like profits. Competitive advantage allows these businesses greater freedom to charge higher prices, which equates to higher profit margins, which means greater profits for shareholders.”*

So remember one of the secrets to successful investing is to focus on buying companies with very large moats!

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*Page 56, 57 The New Buffettology, by Mary Buffett and David Clark

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