Paul Tracy

That's where Microsoft's "moat" began. But it was the introduction of the Windows operating system in 1985 that turned its moat into one of the widest in history.  

Approximately 70% of computers run a form of Windows right now. Microsoft generated $18 billion in revenue from Windows in fiscal 2012 -- nearly 30 years after it was first introduced.

But how -- especially in an industry like technology, which changes so fast -- has Microsoft been able to stay on top of its market?

Few people "love" Windows the same way that they seem to "love" their iPhone... or their favorite drink at Starbucks (Nasdaq: SBUX). Yet billions of people continue to use the product day after day, year after year.

That's because Microsoft -- and Windows in particular -- enjoys a huge economic moat due to high switching costs.

High switching costs mean that the benefits gained from using another product are outweighed by the "costs" of switching. If I wanted to switch to another operating system, I would have to buy the new operating system, and I'd also have to spend time learning how to use it.

And that's not to mention that many software programs are built to run only on Windows, creating another hurdle to switching.

That moat has made Microsoft's founders, Bill Gates and Paul Allen, billionaires several times over.

But investing in economic moats can be a tricky thing?

As I said, moats aren't listed on a balance sheet or income statement. And there is no definitive list of what constitutes a moat and what does not.

But while there isn't an exact list of moats, the most common ones are easy to spot...

 Low-Cost Provider -- A company that can provide the lowest price for the same product can essentially shut its competitors out of a market. This is the reason behind Wal-Mart's (NYSE: WMT) growth over the past several decades.

 High Switching Costs -- I explained how Microsoft has built a moat around its business thanks to high switching costs. These costs keep customers loyal to a product, even if better alternatives exist.

 The Network Effect -- How has eBay (Nasdaq: EBAY) cornered the market in online auctions? Sellers want to list their products on the site because of the huge number of buyers that shop there. And buyers visit the site to find the most options from sellers. Because of its vast network of users, no other auction site rivals eBay's popularity.

 Strong Brand Name -- Coca-Cola (NYSE: KO) is one of the most dominant companies on the planet. Much of its advantage comes from its powerful brand name. That's why even though there are literally hundreds of substitutes, Coke is able to dominate its competition.

 Intangible Assets -- Pharmaceutical companies have been able to pay their investors billions of dollars in dividends thanks to their patents on drugs, which shut out competition. Patents and other intangible assets (like trademarks) can protect a company from direct competition.

Risks to Consider: Now, investing in moats is no guarantee that a stock will beat the market. Plenty of other factors come into play. But if the world's greatest investor has made billions of dollars investing in "wide-moat" companies, don't you think you should too?

Action to Take --> That's why economic moats are one of the key traits I looked for when making my list of The Top 10 Stocks For 2013.

In the latest edition of my annual report, you'll find one "wide-moat" company that has raised its dividend 463% since 2004. Another dominates its market... has increased dividend payments 85% since 2008... and has returned 117% since it went public just over four years ago. You can learn more about these 10 stocks, including several names and ticker symbols here.

Paul Tracy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of SBUX in one or more of its “real money” portfolios. This article appeared orginally at


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