The billionaire investor said one type of competitive advantage is when a company is the low-cost producer due to economies of scale or a better business model. Buffett repeatedly has cited the example of Berkshire Hathaway’s auto insurance subsidiary Geico, which markets directly to consumers without using local insurance agents. Therefore, the company is able to offer lower prices due to its cost structure.
The second type of competitive advantage is when a company owns a powerful product franchise or brand that consumers are willing to pay up for. He used the examples of Coca-Cola and See’s Candies as businesses with this type of pricing power.
Buffett also shared the important questions he asks when assessing the “moat” of a company:
“We are trying to figure out what is keeping — why is that castle still standing? And what’s going to keep it standing or cause it not to be standing five, 10, 20 years from now. What are the key factors? And how permanent are they? How much do they depend on the genius of the lord in the castle?”
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