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Economic moat

Whatever stops competitors from competing away a company's profits.

High returns attract competition, and competition destroys high returns. A moat is the structural reason that does not happen: a brand people will pay more for, switching costs that trap customers, a network that strengthens with scale, a genuine cost advantage, or a market too small to be worth invading.

Its fingerprint in the numbers is persistence: return on capital that stays high for a decade while rivals try and fail to close the gap.

Figure

The only five moats there are

1
Brand
People pay more for the same thing
2
Switching costs
Leaving is painful or expensive
3
Network effects
It gets better as it gets bigger
4
Cost advantage
It can undercut and still profit
5
Scale in a small market
Not worth invading

If you cannot name which of these a company has, it probably does not have one. It is merely doing well, which is a different and far more temporary condition.

Why it matters

Without a moat, today's high margins are a countdown timer rather than an achievement.

The mistake everyone makes

Mistaking a great product for a moat. Great products get copied; structural advantages do not.

Related terms

ROIC
The return on all the money in the business, borrowed and owned alike.
Gross margin
What is left of each pound of sales after the direct cost of making the thing.
Value investing
Buying a business for meaningfully less than you think it is worth.

See Economic moat on a real company

SteadyShares pulls this straight from the filings for 1,100+ companies, alongside moat scores, DCF fair value and peer comparison. Free to look around.

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