What is an Economic Moat?
A term coined by Warren Buffett to describe a company's sustainable competitive advantage that protects its profits from competitors. Like a castle's moat defends against invaders, an economic moat defends market share and margins.
Why Moats Matter
Companies with wide moats can maintain high returns on capital for decades. Buffett has said: "The key to investing is determining the competitive advantage of any given company and, above all, the durability of that advantage."
Types of Moats
Brand power (Coca-Cola), network effects (Visa), switching costs (Microsoft), cost advantages (Costco), intangible assets (patents), and efficient scale (utilities). The strongest companies often possess multiple moat sources.
Quantitative Signals
Consistently high ROIC above WACC, stable or expanding margins over 5+ years, strong cash conversion, and low debt relative to earnings. These financial fingerprints reveal whether a qualitative moat actually translates to economic value.