“In business, I look for economic castles protected by unbreachable ‘moats.'”
That’s how Warren Buffett answered a question on what he looks for in a business to invest in.
What did he mean by a moat?
Let me explain with an example.
Everybody can make a caffeinated soda.
But for a new competitor, beating the brand (and distribution) of Coca-Cola is almost impossible.
People recognize the red logo, associate it with happiness, and have it available to buy in every corner of the world.
It took Coca-Cola 120+ years and billions of dollars to build that moat.
So what Buffett meant was sustainable competitive advantages that compound over time. Remember the flywheel effect.
If you have a business (or a product), you can build 5 types of sustainable competitive advantages.
Sustainable competitive advantages examples:
- Intangible assets: We’ve talked about brand power. Others can be unique technology (Google), copyrights (Disney), or important patents (IBM).
- Network Effect: For some products, the overall value grows with each new user. Like a social media company or an app store. The bigger the network gets, the bigger the moat.
- Cost Advantage: Some companies have lower costs thanks to their scale. A local chain can’t beat Walmart on price.
- Switching costs: When switching to another product or service has high costs. If a company has used Windows and MS Office for years, it requires a lot of time and effort to switch to other solutions.
- Natural monopoly: When a business requires an extremely high investment to start. Usually, the first company in the field is the winner forever — like utility companies.
Moats extend the life span of companies.
So for business decisions, always consider what can give you a sustainable edge.
Sometimes, it will mean sacrifices in the short term.
In its early days, keeping Facebook free was a tough decision for a startup with no revenue.
But that decision allowed them to get 2 billion+ users and build an ad machine.
Yes, moats take time to build.
It can take years or decades depending on the industry.
But the Lindy Effect works here: the longer it takes to build a moat, the longer it will likely last in the future.
Now, can you also build a personal moat for your career?
Why not.
Two ways to build a career moat:
1. Build an uncommon skill set
Imagine you are an architect.
There are millions of good architects — it’s hard to be the best.
But only a few industrial architects have good writing and marketing skills.
So when you create an uncommon (and useful) skill set, your odds of becoming the best are much higher.
Remember talent stacking.
It’s the easiest way to build a personal moat.
2. Become known (for something)
Reputation is a moat.
But it requires an intention to build it.
You have to actively market your work and give people keywords to remember you.
James Clear did it with habits, and Ryan Holiday did it with stoicism.
Whenever somebody talks about these topics, their names come up.
And it works at the micro level too.
You probably have a colleague who is the go-to person for a topic.
So work on your “brand” and market your work to become irreplaceable.
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