ValuationIntermediate· 10 min read

Economic moats: why some companies keep winning

The one thing to remember

Without a moat, high margins are a countdown timer, not an achievement.

Figure

The only five moats there are

Brand

People pay more for the same thing

Switching costs

Leaving is painful or expensive

Network effects

It gets better as it gets bigger

Cost advantage

It can undercut and still profit

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.

Capitalism is a machine for destroying high returns. If a business earns unusually good money, competitors will arrive, undercut it, and compete the profits away. A moat is whatever stops that from happening. Without one, today's fat margins are simply a countdown timer.

The question is never "is this a good business?" It is "what stops someone else from doing this, cheaper, next year?"

The five that actually last

1. Intangible assets

Brands, patents, regulatory licences. A brand is a moat only when it lets you charge more for a physically identical product. Coca-Cola commands a premium over an identical own-brand cola. That is a moat. A logo that nobody will pay extra for is just marketing spend.

2. Switching costs

When leaving is painful, customers stay even while grumbling. Enterprise software that every employee has been trained on, a bank that holds your direct debits, an operating system your whole toolchain depends on. The moat is measured in the pain of departure, not the joy of staying.

3. Network effects

The product gets better as more people use it, which attracts more people. Exchanges, marketplaces, social networks, payment rails. This is the most powerful moat known, because it strengthens itself, and it tends towards winner-takes-most outcomes.

4. Cost advantage

Being structurally able to produce for less: superior scale, a better location, a cheaper resource, a smarter process. It only counts if a rival cannot simply copy it by spending money. Scale that anyone can buy is not a moat.

5. Efficient scale

A market just large enough for the incumbents to make money, and too small to be worth a new entrant's while. Pipelines, regional airports, utilities. Quiet, unglamorous, and remarkably durable.

Things that look like moats and are not

Great management (they leave). Being first (rarely decisive). A superior product (copyable). High market share (a result, not a cause). Cutting-edge technology (obsoletes fastest of all).

How to test for one

The evidence is in the numbers, and it takes the form of persistence. A moat shows up as returns on capital that stay high for years while competitors try and fail to close the gap.

Has return on invested capital stayed above roughly 15% for a decade? That is a moat leaving fingerprints.
Have gross margins held steady rather than eroding? Erosion means the moat is being drained.
Can the company raise prices without losing customers? That is the purest test there is.

In SteadyShares

The moat score on every stock page is our own read on exactly these questions, and the Quality Radar shows it alongside value, growth, health and income.