1 no-brainer way to invest like Warren Buffett

Because of his incredible leadership record Berkshire HathawayWarren Buffett is a legend in the world of investing. He is considered by many to be one of the greatest allocators of capital ever. Because of this position, ordinary investors always try to imitate his strategy in the hope of getting strong returns.

If you want to start investing more like the Oracle of Omaha, I think there is one simple action you should start doing right away that can have huge benefits.

Identify this trait before anything else

Retail investors, and certainly many professional capital allocators, can copy Buffett by focusing only on owning businesses that have a economic moat. This is a single competitive advantage, or a combination thereof, that has proven to be sustainable over a long period of time. It allows a particular company to outperform rivals and earn more return on invested capital.

If a business has a moat, it has a superior competitive position in its industry. It also indicates that the company in question is of high quality. There are a handful of different types of economic moats.

Apple and Walt Disney they have invaluable intangible assets that are almost impossible to reproduce. The iPhone maker is one of the most powerful brands in the world. House of Mouse owns intellectual property that it monetizes in various ways.

Visa and Airbnb they have network effects working in their favor. The payment platform is valuable because of the large number of cards in circulation and the number of merchant acceptance locations around the globe. The alternative accommodation site has 5 million hosts and 8 million listings in 220 countries and regions and handled 125 million bookings in the second quarter. Both Visa and Airbnb attract users because they already have so many, which feeds on itself.

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Banks like JPMorgan Chase and Bank of America have switching costs. As customers, from individual consumers to multinational corporations, use more products and services over time, it becomes more difficult for them to take their business elsewhere.

As the third largest retailer in the world, Costco has a cost advantage. It has unmatched purchasing power with its suppliers. This results in favorable pricing for goods, with savings passed on to customers.

Another source of moat comes from efficient scale. This is typically seen in industries with high capital requirements, few competitors, and minimal growth potential. Think of utilities or railroads, for example.

You may realize that some elite companies are fortunate to have developed multiple economic moats. In addition to its brand, the Apple ecosystem creates switching costs for users. In addition to network effects, the Airbnb brand is so valued in the travel sector that it has become a verb.

Investment perspective

To be clear, the existence of a trench does not automatically mean that a stock is a smart buy. Some grooves die, while others expand and become stronger. Figuring out which companies are in the latter camp requires more work.

There are other factors to consider before adding a business to your portfolio. Does the business generate healthy margins? Does it have minimal debt? Is the management team skilled? Are there significant growth prospects? All of these matter when determining whether a business is high quality or not.

While there are many variables to consider when making a decision, I think keeping a watchlist full of businesses that have economic moats is a fantastic way to improve yourself as an investor. This is a good starting point to build from.