When you’re shaping your own personal financial planning, it’s easy to get lost in the weeds. We’re all looking for the same thing: a business that’s not just in a big, growing market, but one that has a clear edge over its competition. This edge is what allows a company to consistently grow its sales and profits for years. Finding the right framework is a crucial part of any best investment strategy.

The first part is surprisingly simple. You can figure out a company’s market size whether you’re a pro or just starting out. Companies often lay this out right on their investor relations websites. Take Intuit, for example. They’ll tell you that their QuickBooks product has 5 million online subscribers. Then they’ll mention that the potential global market is 800 million customers. A quick calculation (5 million divided by 800 million) shows they’ve captured less than 1% of the market. Now that’s interesting.

Even when a company doesn’t hand you the numbers, a little digging gets you there. For Amazon, we know their North American sales in 2020 were $236 billion. A quick Google search for "U.S. retail sales 2020" reveals a $4.1 trillion figure from the National Retail Federation. Add in Canada’s $600 billion, and you get a $4.7 trillion North American retail market. Amazon’s share? About 5%.

This is all straightforward math. The real challenge, however, is figuring out the quality of the business. Does it have a sustainable competitive advantage? What’s its moat, and is it strong enough to fend off competitors? This is where the true Warren Buffett investment strategy diverges from simple number-crunching. Answering this question requires judgment, something you can’t just find online.

The good news is that this kind of judgment is often just common sense, organized within a helpful framework. You can learn to identify different kinds of competitive advantages and see if a company fits one of those molds, much like an ornithologist classifies birds. Luckily for us, there are far fewer types of moats than there are bird species.

Don't Confuse a Fast-Growing Company with a Great One

Before we get into what a competitive advantage is, let’s talk about what it isn’t. A common mistake, particularly for those following a growth investment strategy, is confusing rapid growth with a real, sustainable edge. As Buffett once said, this is one of the main reasons these strategies often underperform. Focusing on short-term growth can be a recipe for disaster.

I once had a client who was adamant about buying stock in Vonage, a company that pioneered routing phone calls over the internet and went public in 2006. After a quick look, it was clear that nothing stopped other companies from copying what they did. Vonage had no moat. Their tech wasn't faster, their costs weren't lower, and customers didn't care who routed their calls.

I talked the client out of it, and it was the right call. Once competitors jumped in, Vonage’s revenues and profits collapsed. Three years after its IPO at $17 per share, the stock had lost over 95% of its value. It eventually sold in 2021 for a price that amounted to a measly 1.5% annualized return since its public debut—hardly the market-beating return you want for your personal finance portfolio.

GoPro is an even clearer example. The company, known for its handheld action cameras, went public in 2014 with a $3 billion valuation that quickly doubled. Investors loved the idea, but so did competitors. The market became brutally competitive, and GoPro’s value plummeted by 85%, never recovering. This proves Buffett’s point: “Never confuse a growth industry with a profitable one.” This warning is especially true for tech hardware, which is much easier to imitate than software.

The Old-School Moat: Being the Low-Cost Producer

Even though they are household names, major airlines like Delta and United have all gone bankrupt at least once. Why? Because they operate in a commodity-like industry without a real edge. They compete on price, giving most of the value to consumers.

In markets for commodities like corn, steel, or even airline tickets, the only real advantage is being the low-cost producer. When products are largely undifferentiated, price is king. The company that can make something cheaper than anyone else will win. It’s as reliable as a law of physics. This applies to more than just physical goods; it's true for anything where price is the main differentiator. People shop at Walmart because it leverages its massive scale to get products cheaper and pass the savings on.

The digital age has only amplified this. With tools like Instacart and Google Flights, price comparison is instantaneous. The internet brought price transparency, and the smartphone perfected it. You can stand in a Best Buy and check if another retailer can beat their price on the spot.

The Power of a Brand

The Industrial Age brought mass production, but it also took away the personal connection people had with the things they used. As people moved from farms to factories, they started buying products from stores instead of making them. Without firsthand knowledge, they began to rely on brands with reputations for quality.

Soap was one of the first mass-branded products. A great example is Pears soap. A barber named Andrew Pears created a gentle, translucent soap in the late 1700s for his wealthy clients. But it was Thomas Barratt in the late 1800s who turned it into a household name for the masses through brilliant advertising. He understood the power of brand trust and systematically built it, creating a moat that allowed Pears to charge a premium for a product made from simple ingredients.

This is the essence of a brand moat, and it has been a cornerstone of the Warren Buffett investment strategy for decades. He bought Coca-Cola in 1988 because he understood that the brand was tied to happiness in people’s minds worldwide. No amount of price-cutting from competitors like Sam’s Cola could break that bond. As Buffett says, "That is what you want to have in a business. That is the moat."

But brands can be fickle. The list of dead or dying brands is long. Before you invest in a company whose main advantage is its brand, you have to be convinced it has staying power. This is especially true today, as social media allows new companies to challenge legacy brands with incredible speed.

Modern Fortresses: Platforms and Switching Costs

When a company becomes the go-to application for something—like search or social media—it can become a platform. This standardization is a competitive advantage in itself. Think of Apple. The iPhone is a hardware device, but the real magic is the App Store. Developers pay Apple a 30% cut for the right to sell to over a billion iPhone users.

You should always be on the lookout for companies that have become, or could become, platforms. They are like aircraft carriers from which a company can launch new ventures. The deeper a company gets its hooks into you, the harder it is to leave. These are called switching costs. So many people have archived their lives in Microsoft Word and Excel that switching to something else would be an enormous headache.

This "stickiness" raises the drawbridge on the company's moat. It’s not always about technical difficulty, either. It’s not hard to switch from Google to Bing, but the psychic switching costs are huge. People are used to Google. It works. Why bother changing? Pursuing companies with these characteristics is a far cry from a speculative, aggressive investment strategy.

Moving First, and Moving Fast

The idea of a "first-mover advantage" comes from chess, where the player with the white pieces moves first and seizes the initiative. In business, staking the first claim in a new market can secure the best territory. Decades ago, 3M invented Scotch Tape and faced no real competition for over 30 years.

In today's fast-paced digital economy, however, a company that doesn’t constantly innovate won’t last thirty months, let alone thirty years. That's why speed matters so much. Elon Musk's philosophy at Tesla and SpaceX is to launch first and upgrade later. Perhaps a better term is "fast-mover advantage." Sears didn't invent the mail-order catalog or the department store, but it was the fastest and most aggressive in both areas, which led to a century of prosperity.

Being first or fast can establish an advantage, but it rarely perpetuates one. Companies like Amazon and Tesla used their early lead to build secondary moats, like low-cost positions and powerful brands.

The Ultimate Moat: Network Effects

There's one final source of competitive advantage, and it may be the most powerful of all: network effects. A product or service with network effects becomes more valuable as more people use it.

Venmo is a perfect example. A few friends started using it to split bills, and that small group created a gravitational pull. Soon, everyone had to get the app because everyone else was saying, "Just Venmo me." The old-fashioned term is a "virtuous circle," but tech folks call it "the flywheel effect." A heavy flywheel is hard to get spinning, but once it’s going, it’s almost impossible to stop.

This dynamic is why many tech markets are "winner take all" or "winner take most." People are on Facebook because other people are on Facebook. Who needs a second social network? The value of a network grows exponentially as its user base grows. Digital networks like Facebook's reach the entire global population, making them exponentially more valuable than any physical network that came before them. Best of all, software companies build these incredible networks on infrastructure that someone else paid for. It’s no wonder they’ve become so big, so fast.