 This is a medieval castle and what you see here is a moat or a water channel that makes it doubly difficult for attacking armies to break it But why should we talk about castles and moats in a video about the greatest stock market guru of all times Warren Buffett? That's because of what you're about to hear next. What we're trying to do is we're trying to find a business with a wide and long-lasting moat around it Surround and protecting a terrific economic castle With an honest Lord in charge of the castle Economic moat has become the number one principle of stock market investing across the world But how is it even possible to have a long-lasting economic moat? Because the logic of capitalism tells us that competition brings down barriers And it is almost impossible to have a long-term advantage in any industry Others will enter any space which provides higher rate of profit Bring down prices and then the rate of profit will fall. So if capitalism is really about competition and free markets Economic moats cannot exist. However honest and good the owner or the lord of the castle might be But in the real game of capitalism Impenetrable castles do exist and there's a special name for them We have a ginormous monopoly board and thousands of dollars We're playing with real money Warren Buffett and every other market guru knows what this bearded gentleman said Many many years ago that capitalism and free market competition ultimately creates big businesses ultimately Economic power gets concentrated in the hands of a few people who form monopolies And that happens even when everyone is equal at the starting line one or two Power ahead and they win the race. Let's explain this through the hypothetical example of the pizza maker Mr. Giannini. Mr. Giannini has inherited some money and he wants to invest in a new business He starts an Italian restaurant in a town where no one has ever eaten Italian food He has a tremendous chef who makes great pizzas soon pizza eating becomes a craze Everyone is eating pizzas everywhere Mr. Giannini is making loads of money and he is happy now other pizza restaurants pop up everywhere hoping to cash in on the Pizza fad so mr. Giannini faced with competition says okay. I have a lot of cash I have made a lot of money. So let me stop these competitors by giving away pizzas for free And he also wants to make sure that whenever people think of pizzas they think of mr. Giannini's pizza So he gets some stars popular people's icons to endorse his pizzas And you signed a contract guaranteeing him certain concessions one of them being a spot on the show Contractor no, I will not bow to any sponsor Soon thanks to mr. Giannini's pricing policies predatory pricing policies other pizza makers can't compete anymore They go bankrupt and they get out of the business now mr. Giannini is the last man standing He can bring up his prices once again because people have nowhere else to go They were getting free pizzas every other competitor got wiped out So now they have to pay the full price and because there are no rivals around his chef No longer dares to ask for a raise he continues to work for the same salary even though Overall prices have been going up mr. Giannini's tomato supplier is also forced to sell at the discount because mr. Giannini is His biggest customer the cheese factory too has to give a hefty rebate Mr. Giannini's profits double because he can charge whatever he wants for his pizza And he can pay as less as he wants to his vendor, but mr. Giannini doesn't stop there He wants to ensure that no competitor can come up once again So he decides to bribe the local mayor and the local administrators to ensure that the rules are tweaked So that no one can get a new pizza license Giannini's pizza now becomes a chain with branches everywhere It is now almost a monopoly Giannini's pizza gets listed in the stock markets and investors love it because in Warren Buffett's words It has a great moat and as its stock price rises It becomes more and more valuable and mr. Giannini's company can command more and more funds in the market Which makes it even more difficult for any small company any small competitor to go up against it And if any small pizzeria manages to pose a channel, what does mr. Giannini do? He offers them a price and buys them out and merges them into Giannini's pizza This is how monopolies are inevitably formed in free market capitalist conditions It does not need any special treatment. This inevitably rises out of competition itself This is a secret of capitalism that Warren Buffett and all other market gurus know They just sugarcoat it and call it a moat. That's the show today This is part one of a three-part series on what Warren Buffett knows about capitalism that you don't Which makes him one of the richest people in the world. Thanks for watching. Do share this video like our channel Subscribe to it as well