What Is an Economic Moat? How to Spot Companies With Lasting Advantages

Warren Buffett popularized the idea of an economic moat — a durable competitive advantage that protects a company's profits from competitors, like a moat around a castle.

Five Common Sources of Moats

1. Brand power: Customers pay more for trusted names.
2. Network effects: A product becomes more valuable as more people use it, like payment networks and marketplaces.
3. Switching costs: It's costly or inconvenient for customers to change providers, as with enterprise software.
4. Cost advantages: Scale or unique processes let a company produce more cheaply than rivals.
5. Intangible assets: Patents, licenses and regulatory approvals that block competition.

How to Spot a Moat in the Numbers

• Consistently high return on equity and returns on invested capital.
• Stable or rising gross margins over many years — visible on the income statement.
• Strong, steady free cash flow.
• Market share that holds up against new competitors.

Moats Can Erode

Technology shifts, regulation and new business models can shrink even wide moats. Revisit your thesis regularly using our stock analysis checklist.