What Is an Economic Moat?
A moat is the durable competitive advantage that protects a company’s profits. Here are the main types.
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An economic moat — a term popularised by Warren Buffett — is a company’s durable competitive advantage that protects its profits from competitors, like a moat protects a castle. For long-term investors, a wide moat is one of the most important things to look for.
Why moats matter
In a free market, high profits attract competition that eventually erodes them. A company with a strong moat can sustain high returns on capital (ROCE) for years, compounding shareholder wealth. Businesses without a moat see their profits competed away.
The main types of moats
- Brand / intangibles — a trusted brand or patents that let a company charge more (e.g. premium consumer brands).
- Network effects — the product gets more valuable as more people use it (exchanges, platforms), making it hard to displace.
- Cost advantage — producing more cheaply than rivals (scale, process, location).
- Switching costs — customers find it costly or painful to switch (enterprise software, banking relationships).
- Efficient scale — a market only large enough to support a few players profitably.
How to spot a moat
- Consistently high margins and ROCE over many years, through cycles.
- Pricing power — can the company raise prices without losing customers?
- Stable or growing market share.
- Ask: why can’t a well-funded competitor easily take this business?
The caveats
- Moats can erode — technology and disruption can breach once-strong moats, so monitor them.
- A moat isn’t a buy signal alone — even a wide-moat company can be overpriced; valuation still matters.
Favour durable, wide-moat businesses for long-term compounding, and keep checking the moat is intact. It pairs naturally with value and quality investing. Education only, not a recommendation.
