Moat (Economic Moat)
A durable competitive advantage that rivals cannot easily copy — like a moat around a castle, it protects the company's profits. A concept emphasized by Warren Buffett.
Moat = barriers to entry that preserve high profitability over a long time
When the moat is deep, high margins (operating margin) and returns on capital (ROIC) tend to be sustained for a long time.
In plain terms
Castles used to dig a deep water channel (a moat) around them so enemies couldn't get in easily. A company's "economic moat" works the same way. If it has strengths competitors can't easily copy, the company can protect its profits for a long time.
Examples include a powerful brand (Coca-Cola), a service that's a hassle to switch away from once you start using it (switching costs), or a platform that gets stronger as more people gather on it (network effects). The deeper the moat, the less the company is battered by competition.
What it tells you
A moat is a way of gauging "how long this company can hold on to high profitability." Even a company earning well today can see profits eroded as competitors pile in, if there is no moat.
It is one of the criteria Warren Buffett values most. He described wanting to buy "a wonderful castle-like business surrounded by a wide and deep moat."
Formula
Moat = barriers to entry that preserve high profitability over a long time e.g., strong brand, switching costs, network effects, cost advantage, patents, regulatory protection
What high or low means
When the moat is deep, high margins (operating margin) and returns on capital (ROIC) tend to be sustained for a long time. When the moat is shallow, even good results get eroded quickly by competition.
Moats don't last forever. Technological change or a new competitor can fill in a moat that once looked solid (as with Nokia and Kodak, both strong in their day).
Earning well right now and having a moat are two different things. It could be a temporary boom. A moat shows up in whether profitability holds up over time even when competitors attack, and whether ROIC stays high consistently is one clue.
Moats can collapse too. There are many cases, like Kodak (film) and Nokia (mobile phones), where a seemingly impregnable moat disappeared with technological change. A moat is not a permanent state but a state that lasts while it lasts.
Warren Buffett's favorite example of a moat is Coca-Cola. He began buying its shares in large amounts from 1988, and the reason was simple — a brand built over more than 100 years and a worldwide distribution network can't easily be recreated, no matter how much money you have.
Buffett described the power of that brand along the lines of: "Even if someone gave me $100 billion to beat Coca-Cola, it couldn't be done." That strength no one can match is exactly what a moat is. In fact, Coca-Cola has kept 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 SEC-filing-based financial metrics alongside the sector benchmark.
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.