Definition
Coined by Warren Buffett, an economic moat is a sustainable competitive advantage that enables a company to maintain above-average profitability over time. Moats can come from brand power, network effects, switching costs, cost advantages, efficient scale, or intangible assets like patents. Wide-moat companies tend to generate superior long-term returns.
lightbulb Example
Apple has a wide moat from brand loyalty and ecosystem lock-in (switching costs). Users invested in iPhones, Macs, and iCloud are unlikely to switch, allowing Apple to maintain premium pricing and 40%+ gross margins.
Pro Tip
Look for companies with ROIC consistently above 15% for 10+ years—this usually signals a wide economic moat.
verified_user Key Points
- Brand power, network effects, switching costs, cost advantages are key moat types
- Wide moats sustain above-average returns for decades
- Moat strength can be assessed through sustained high ROIC
- Narrow moats erode faster under competitive pressure