Warren Buffett once said, “In business, I look for economic castles protected by unbreachable moats.” The castle is a metaphor for a company, and the moat represents a strong competitive advantage. Naturally, a wider moat offers more protection in the long-term. The Oracle of Omaha has provided a great deal of wisdom over the years, but this piece of insight is more evident than ever.
Corporate America is a battlefield with an endless supply of warriors trying to breach moats in pursuit of profits. In a 2007 letter to shareholders, Buffett explains, “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business ‘castle’ that is earning high returns.”
A powerful worldwide brand is one of the most recognizable economic moats. While it is considered to be an intangible asset, it is measured in dollar terms by BrandZ, the world’s largest brand equity database firm.
Calculating variables such as branded earnings, financial value, and brand contribution, the most valuable 100 brands around the globe grew their worth 7 percent to $2.6 trillion last year, with all but two of the 13 categories in the ranking posting year-over-year growth.
Interestingly, the stock performance of the most valuable brands easily outperformed the broad market. To little surprise, Buffett’s Berkshire Hathaway (NYSE:BRKA) owns several names on the list.
Heeding Buffett’s lesson on economic moats and powerful brands has been very profitable in recent years. Between April 2006 and April 2013, a portfolio filled with BrandZ’s top 100 brands has crushed the S&P 500. As the chart below shows, BrandZ’s portfolio has surged 58 percent, while the S&P 500 (NYSEARCA:SPY) has gained 23 percent.
Of Buffett’s ten largest equity holdings, eight appear on the top 100 valuable brands list. At the end of the first quarter, Berkshire held large stakes in U.S. Bank (NYSE:USB), Wal-Mart (NYSE:WMT), American Express (NYSE:AXP), International Business Machines (NYSE:IBM), Coca-Cola (NYSE:KO), and Wells Fargo (NYSE:WFC). Procter & Gamble (NYSE:PG) — Buffett’s fifth largest holding — made the most valuable brands list twice with Gillette and Pampers.
Buffett has not been shy about his bullish stance on America. In a recent interview with CNBC, he said, “In terms of the economy, the luckiest person born in the history of the world is the baby being born in the United States.” Considering this, it is very suiting that almost half of the top 100 brands are based in North America, and account for two-thirds of the top 100’s $2.6 trillion brand value.
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Read the original article from Wall St. Cheat Sheet