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Warren Buffet coined the term "economic moat" and has put a large amount of trust into using economic moat as a key factor in picking stocks to invest in. What exactly is economic moat? How can you use moat to determine what stocks to put your hard earned money into?

The term economic moat refers to a business' ability to maintain competitive  advantages over its competitors, so that it can protect its market share and its long-term profit picture. The key to this definition truly is the word maintain, because moat is the ability to keep that competitive advantage for the long-term. A company with economic moat is a company that has effectively created a barrier, which prevents other companies from gaining market share or cutting into its profits.

A company that enjoys a strong amount of economic moat in their business is said to have a "wide moat." Wide moat companies are one of the first thing that Warren Buffett looks for in prospective investments. A famous quote of Buffett is "In business I look for economic castles protected by unbreachable moats." The moat of a company is essentially a castle that cannot be overtaken by new or old competitors.

What makes a company wide moat? A company is generally classified as wide moat if it has characteristics such as substantial market share and great returns on capital for long periods of time. Moat is something that must be built up over a long period of time.

Why should you use moat in selecting your stocks? A company with moat is far more likely to be able to sustain a long-term growth level and ward off potential newcomers. Looking for those companies who have wide-moats in their respective industries can be seen as somewhat of a safety net to the investor.

Paraphrasing Warren Buffett now, The importance of moat is best described by realizing that the key to investing is determining the competitive advantage of a company and the durability of it.

If you are able to find these companies with durable competitive advantages, you are very likely to succeed in investing. Since this article was originally published I have also wrote about The Top 10 Wide Moat Stocks, which gives my picks for the 10 stocks with the most moat.

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