What exactly is a competitive advantage? This question may seem simple, but behind it lies the core logic of investment.

Many people regard the concept of "moat" as a guiding principle, but in essence, it is just a metaphor. Warren Buffett used this term to describe a company's competitive barriers and business resilience. Essentially, it is an analysis of two things: how much profit a company can make and how long it can sustain that profit.

From a practical perspective, there are two key indicators that determine the value of a business. The first is profit margin — how strong your current cash-generating ability is. This determines the earnings you can obtain in each cycle. The second is sustainability — how long you can maintain this profitability. A company that makes money but is disrupted after three years is ultimately illusory.

Why are these two indicators important? Because the underlying logic of wealth growth is compound interest. What are the two most critical variables in the compound interest formula? One is the annual return rate, and the other is the time period. In investment decisions, time is often more valuable than the return rate.

Warren Buffett later introduced the concepts of "wide" and "narrow" moats. This classification reflects the differences between companies in terms of competitive intensity and substitutability. Companies with wide moats are difficult for competitors to challenge, giving them strong pricing power; companies with narrow moats are more easily impacted by new entrants, and their profit margins can be compressed.

In the current market, when we evaluate a project or company, essentially we are asking: how large is its profit space, and how long can this space be maintained? Only by considering both dimensions can we see the true value of an investment.