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Saturday, December 26, 2020

Charlie Munger: How to Identify a Resilient Economic Moat

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When considering a company's investment potential, according to Warren Buffett (Trades, Portfolio), it is critical to determine whether it has "a moat around it with a very valuable castle in the middle." While such a moat can take different forms, its function is the same: protecting the company from competitive threats.

"Moats have been breached time after time. Imagine the Eastman Chemical Company going broke. Imagine all these great department stores being on the edge of extinction. Imagine all those monopoly newspapers going down. Look at the strength of the American auto industry compared to what it was, say in 1950. I think the moats are disappearing rapidly. I mean the old classical moats. I think it's probably a natural part of the modern economic system, as in old moats stop working."

"Berkshire owns the Burlington Northern railroad. You can hardly think of a more old-fashioned business than a railroad business. It's an excellent asset. Who is going to create another trunk railroad? We made that a success, not by conquering change but by avoiding it. It helps to have a position that almost can't be taken away by technology. How else will you haul goods across the land, from Los Angeles to Chicago?"

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