Investing

Warren Buffett believes this is 'the most important thing' to find in a business

Key Points
  • Warren Buffett says successful investments are often companies that are low-cost producers or that own powerful brands.
  • "The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle," he said.
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"Most moats aren't worth a damn"

Warren Buffett believes the "most important" factor to pick a successful investment is judging the durability of a company's competitive advantage or so-called "moat."

Buffett explained how an investor can assess a company's "moat" during a Berkshire Hathaway annual shareholder meeting in 1995, in a clip found using CNBC's Warren Buffett Archive.

"The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle," Buffett said.

Warren Buffett
David A. Grogan | CNBC

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?"