Economic Moat
A structural advantage that protects a firm's long-run economic profit from competition.
Popularised by Warren Buffett and formalised by Morningstar, a moat is a durable barrier that lets a company sustain returns on capital above its cost of capital. The five canonical moat sources are:
- Intangible assets (brands, patents, licences)
- Switching costs (enterprise software, payment rails)
- Network effects (marketplaces, social graphs)
- Cost advantages (scale, process, unique access)
- Efficient scale (rational oligopolies in bounded markets)
Why it matters. A DCF's long-range growth and margin assumptions only hold if the competitive moat is deep enough. Without a moat, ROIC mean-reverts to the cost of capital, and intrinsic value collapses. Moat analysis is where the *quality* of a compounding estimate is made or broken.
Pitfalls. Moats erode — Kodak, Nokia, Blockbuster. Monitor moat signals (pricing power, share stability, customer churn) every quarter; do not assume yesterday's moat is still intact.
See it applied
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