Paul Tracy

When he buys a stock, Warren Buffett places more emphasis on one factor above almost any other.

Since 1986 he has mentioned this single trait 20 times in his annual shareholder letters. He calls it "essential for sustained success."

However, you won't find it listed on a company's balance sheet. Its value doesn't rise and fall with the market. And even if a company reports great earnings, the worth of this one advantage still can't be calculated.

But that doesn't keep it from being a company's most valuable possession.

Take the nasty bear market of 2008 and 2009. From its peak to trough, the S&P lost more than 55%. No investment completely avoided the downfall.

Well, almost no investment. Of the 500 stocks in the S&P, only nine made money during that period.

Of those nine stocks, six of them (two-thirds) had this advantage.

But this advantage also helps these stocks beat the market in uptrends, too. After all, Buffett has made billions thanks to companies with this trait.

So what single advantage can capture the attention of Warren Buffett... help a stock beat the market in an uptrend... and help it fall less in a downtrend?

That advantage is a term originally popularized by Buffett himself -- an economic moat.

As Buffett puts it...

"A truly great business must have an enduring "moat" that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business "castle" that is earning high returns.

"Therefore a formidable barrier such as a company's being the low-cost producer or possessing a powerful world-wide brand is essential for sustained success. Business history is filled with "Roman Candles," companies whose moats proved illusory and were soon crossed."

- Warren Buffett, 2007 Berkshire Hathaway Shareholder Letter

Economic moats protect a business from competition. That helps the company with a moat earn unusually high profits.

Let me give you an example...

Everyone knows Microsoft's (Nasdaq: MSFT) incredible story. In the 1970s, Paul Allen and Bill Gates created the company, reportedly earning $1 million within their first year of business.


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