Economic Moat
A durable competitive advantage rivals cannot easily copy — like a moat around a castle, it protects a company's profits. A concept stressed by Warren Buffett.
In plain terms
Old castles dug a deep waterway (moat) around them so enemies could not easily get in. A company's "economic moat" is the same. With a strength rivals cannot easily copy, the company can protect its profits for a long time.
For example, a powerful brand (Coca-Cola), a service that is a hassle to switch once you use it (switching costs), a platform that gets stronger the more people gather (network effects). The deeper such a moat, the less it suffers from competition.
What it tells you
A moat is a concept for gauging "how long this company can protect its high profitability." Even a company earning well now sees its profit cut as rivals pour in if it has no moat.
It is one of Warren Buffett's most valued investment criteria. He has expressed wanting to buy "a wonderful castle of a company surrounded by a wide, deep moat."
Formula
moat = a barrier to entry that protects high profitability for a long time e.g. a strong brand, switching costs, network effects, cost advantage, patents, regulatory protection
What high or low means
A deep moat tends to sustain high margins (operating margin) and capital returns (ROIC) for a long time. A shallow moat sees even good results quickly cut by competition.
A moat is not forever. Technological change or a new rival can fill in a once-fine moat (like the once-strong Nokia and Kodak).
Beware the illusion of "it earns well now, so it has a moat." A temporary boom and a true moat differ. A true moat is told by whether profitability is sustained for long even when rivals attack (look at whether high ROIC is steady).
A moat can collapse too. Like Kodak (film) and Nokia (phones), many seemingly impregnable moats vanished with technological change. Remember there is no "eternal moat."
A moat example Warren Buffett loves to cite is Coca-Cola. He bought Coca-Cola stock in bulk from 1988, and the reason was simple — a brand built over 100 years and a worldwide distribution network cannot be easily recreated no matter how much money you have.
Buffett expressed the brand's power along the lines of "even if someone gave me $100 billion to beat Coca-Cola, it would be impossible." That uncopyable strength is exactly a moat. Coca-Cola did sustain high profitability for decades and brought Buffett enormous returns.
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Economic and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.