A structural barrier that lets a business earn high returns on capital for years without competitors eroding them. The core of Buffett's investment philosophy.
What it is
"Moat" is the metaphor: in medieval castles, a moat was the trench that kept attackers out. In business, an economic moat is whatever makes it expensive, slow, or impossible for competitors to copy your profits.
The five common moat types
1. Network effects - each user makes the product more valuable for the next (Visa, Meta, eBay)
2. Switching costs - leaving the product is painful (Microsoft Office, SAP, Salesforce)
3. Intangible assets - brand, patents, regulatory licences (Coca-Cola, pharma, exchanges)
4. Cost advantages - scale, geography, or process let you sell cheaper (Costco, GEICO, Walmart)
5. Efficient scale - the market is too small to support more than one or two players (regional pipelines, airports)
How to spot one
20%+ ROIC for 5+ years - the financial signature of a moat
Stable or rising gross margins during competitive entry
Customer retention > 90% in subscription businesses
Pricing power - can the company raise prices in a recession without losing volume?
Pat Dornan's test
Morningstar's Pat Dorsey: "If the company's ROIC trended down toward the cost of capital over time, it didn't have a moat. The moat is what prevents that mean reversion."