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Commentary

Economic Moats Matter: Here's the Evidence

Seeking companies with competitive advantages and attractive valuations has led to smart investing.

By Michael Holt, Andrew Lane, and Hari Narayan

In a free-market economy, capital seeks the areas of highest return. Whenever a company develops a profitable product or service, it doesn’t take long before competitive forces drive down its economic profits. Only companies with an economic moat—a sustainable competitive advantage that allows a firm to earn above-average returns on capital over a long period of time—are able to hold competitors at bay.