What is an economic moat?
A moat is the durable advantage that stops competitors eroding a great business’s profits. It’s the first thing Buffett looks for — here’s what counts as one, and how to spot it.
The idea
An economic moat is a durable, structural advantage that protects a company's profits from competitors — the business equivalent of a moat around a castle. The term was popularised by Warren Buffett, and finding one is the first thing his approach looks for.
Why it matters
High profits are a magnet for competition. Without a moat, rivals pile in, undercut prices, and compete those profits away. A moat is what lets a company keep earning high returns for years — and that durability is what long-term investors are really paying for. A cheap business with no moat can get cheaper; a wonderful business with a wide moat compounds.
The main types of moat
- Intangible assets — brands, patents and licences that let a company charge more or lock out rivals. Think premium consumer brands or patent-protected medicines.
- Switching costs — when it's expensive, risky or just a hassle to change provider. Enterprise software and banking relationships are sticky for exactly this reason.
- Network effects — the product gets more valuable as more people use it, so the leader pulls away. Marketplaces, payment networks and social platforms.
- Cost advantage — the ability to produce more cheaply than anyone else, through scale, process or location, and still make money at prices rivals can't match.
- Efficient scale — a market only large enough to support one or two players profitably, which quietly deters new entrants. Common in utilities and niche infrastructure.
How to spot one
Moats show up in the numbers as durably high returns on equity and margins, pricing power (the ability to raise prices without losing customers), and stable or growing market share over many years. One good year proves nothing; a decade of it suggests a real moat.
And the caveat: moats erode. Technology and changing habits can fill in even a wide moat — so it's worth re-checking that the advantage still holds, not assuming it's permanent.
In Oak Growth, the moat is Pillar 1 of the Buffett 4-pillar screen.
Put this into practice — open the screener →