On Economic Moats

Why it is important
This term is popularised by Warren Buffet and used as part of his decision making process on whether he should or should not invest.  A business with an economic moat means, like a moat around a medieval castle, it is able to protect itself.  For the business it means it is able to protect its earnings over the long term.

It is important for me when I invest, that I can see the presence of an economic moat around the business, especially when I am in for the long haul.  If I can assure myself that the earnings are protected over the long term, then I can sleep peacefully at night without worrying if the business will "close shop" tomorrow.

So the question is, "Is the business able to protect its earnings over the long term?"

Qualitative aspects
Businesses protect their earnings in many different ways, some of my favourite ways include:
Those moats that are result of having no choice or not much of a choice.

Think of a Toll Bridge. (e.g. CM Pacific which owns toll bridges in China is listed on SGX)

Think of a local newspaper monopoly. (e.g. SPH is listed on SGX)

While there are potential challenges such as the internet challenge for the traditional newspapers but lets keep things simple for now.

Another type of moat would be the result of brand differentiation.

E.g. Montessori Pre-School Education.  As a parent of a toddler looking for good pre-school education, I am actively sourcing for pre-school options which are proven and well established.  Immediately Montessori came to my mind as opposed to any "run of the mill" pre-school. It is an established brand with sound philosophies and methods accompanied with a century of proven track record. (not listed)

Quantitative aspects
Just depending on qualitative understanding is incomplete, I will also need to take a look into the financial statements of the business.
The numbers will paint a picture of how well the business has been protecting its earnings.
While past performance does not guarantee future results, a long consistent track record of strong earnings and return on equity over many years would suggest the presence of a sustainable moat and would give us at least some assurance of repeated success as compared to say, a business with a track record of inconsistent earnings.

With both the qualitative and quantitative aspects aligned and "singing the same song", I would feel more confident of the business and put it under my "watch list".

Then with an appropriate "margin of safety", it becomes a signal for me to buy.