Warren Buffett — the Oracle of Omaha — is considered one of the greatest investors of all time.

Over the years, he’s become famous for making billions of dollars through his smart, no-nonsense investment strategy.

So when building — or tweaking — your own strategy, it’s always a good idea to consider Buffett’s advice.

Today we’d like to share with you one factor that he looks for in a company. It’s a factor that he places more emphasis on than nearly any other.

In fact, Buffett has mentioned this single trait more than 20 times in his annual shareholder letters since 1986. He calls it “essential for sustained success.”

And for good reason. Take the nasty financial crisis of 2008 and 2009, when the S&P 500 plunged more than 55%. Only nine stocks in the index made money during that period.

Six of them had this advantage.

What is this wealth-building stock trait?

It’s a concept originally popularized by Buffett himself: an economic moat.

As Buffett once put it:

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.

Therefore a formidable barrier such as a company’s being the low-cost producer or possessing a powerful worldwide brand is essential for sustained success. Business history is filled with “Roman candles” — companies whose moats proved illusory and were soon crossed.

In other words, a business’ economic moat protects it from competition and often helps it earn unusually healthy profits (and potentially market-beating stock returns).

5 Moats That Signify a Great Investment

While there isn’t an exact list of moats, the most common ones are easy to spot:

Low-Cost Provider: A company that can provide the lowest price for the same product can essentially shut its competitors out of a market. This is the reason behind Walmart’s (NYSE: WMT) growth over the past several decades.

High Switching Costs: These costs keep customers loyal to a product, even if better alternatives exist. Microsoft’s (NSDQ: MSFT) Windows operating systems, for example, are still running on more than 80% of desktops, making it a hassle for consumers to “switch” in buying and learning a new operating system. And that’s not to mention that many software programs are built to run only on Windows, creating another hurdle to switching.

The Network Effect: How has Amazon (NSDQ: AMZN) come to dominate the market in online retail? Sellers want to list their products thanks to the huge number of buyers that shop there. And buyers visit the site to find the most options from sellers. Because of the vast network of users, no other sites rival its popularity.

Strong Brand Name: Coca-Cola (NYSE: KO) is one of the most dominant companies on the planet. Much of its advantage comes from its powerful brand name. That’s why even though there are literally hundreds of soda substitutes, Coke still dominates the competition.

Intangible Assets: Patents and other intangible assets (like trademarks) can protect a company from direct competition. Pharmaceutical companies, for example, have been able to pay their investors billions of dollars in dividends thanks to their patents on drugs, which shut out competition.

The Bottom Line

Investing in companies with moats is no guarantee that the stock will beat the market. There are plenty of other factors that come into play.

But considering how frequently the world’s greatest investor has touted the benefits of investing in “wide moat” companies — and considering how well they held up during the 2008-2009 bear market — stocks carrying this wealth-building trait are worth a serious look.

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