Why you are buying stock of the Company by using your hard earned money? You may use that money for any other reason. Like spending for dinner, while enjoying with your family?
Because you want to earn money in Future with it.
How you will earn money?
With Dividend or Capital Appreciation.
How that money will come to you?
When the company will earn it.
That is what Warren Buffett is trying to figure out here.
What if the business or the operation of the company or the product or Service of the company will NOT SURVIVE? Say Pager. Good product but how big lifespan? Now assume if you Invested the money in any Pager company. Will that make money for you? Not really.
There are some companies which are doing there business for long Time. Product is tried and tested. Market knows them. And they will not go out of the Business easily. Best example here is Google. I know that Warren Buffett don’t like to invest in internet companies. It if I am not wrong, Charlie Munger, somewhere mentioned Moat of Google.
What is Moat?
In ancient times, Castle is not only Defence but also partly Citi where people are living so its soft target for enemy. Kings and owners need to defend it. One way to do it is digging land around castle and filling Water in it.
Something similar is there with Economic Moat.
It is Business’ ability to maintain competitive advantage over its competitor to protect its long term profile and market Share.
One more example may be Facebook. The way they are doing business is important and make them different.
In India I may give you examples as Colgate Palmolive, ITC, Coal India etc.
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