Dictionary / How companies make money
What Is an Economic Moat?
An economic moat is something that protects a company from competitors, the way a moat protects a castle. It lets a company keep earning high profits for many years.
Where the idea comes from
Warren Buffett made the term popular. He looks for businesses with wide moats, because profits that competitors cannot easily steal can keep growing for a long time.
Types of moats
- Brand: people pay more for a name they trust.
- Network effects: the product gets better as more people use it.
- Switching costs: moving to a rival is painful.
- Cost advantage: scale lets you sell cheaper.
- Patents and licenses: the law keeps others out.
How to spot a moat
Look for a high return on invested capital that stays high for many years. Without a moat, competition usually pushes high returns down.
Moats can shrink
New technology can drain a moat. Newspapers had strong local moats until the internet arrived. Check that the moat still holds.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Business modelHow a company makes money, in one sentence.
Economies of scaleGetting cheaper per unit as you get bigger.
ROICHow well a company turns invested money into profit.
Profit marginHow many cents of profit from each dollar of sales.
Value investingBuying good companies for less than they are worth.
Intrinsic valueWhat a business is really worth.