Investing term
What is Economic moat?
A durable advantage that lets a business defend high returns against competitors over time.
An economic moat is a durable advantage that protects a company's profits from competitors — a powerful brand, network effects, high switching costs, patents, regulatory barriers, or unbeatable scale. The term, popularised by Warren Buffett, pictures a business as a castle whose moat keeps rivals from storming in and competing away its high returns.
The wider the moat, the longer a business can sustain above-average profitability before competition erodes it — which is exactly what makes moats central to long-term investing. In competitive markets, high returns normally attract rivals who compete them down (mean reversion), so a company that can defend its returns for years or decades is rare and valuable. Assessing whether a moat is real, wide, and durable — or narrow and eroding — is one of the most important judgements in analysing a business, because it determines how long the good times can last.
An economic moat — brand, network effects, switching costs, scale — keeps competitors from eroding a company's high returns, letting it compound for years. The wider the moat, the longer the good times last.
For example
A software company whose customers face huge costs and disruption to switch providers has a switching-cost moat — rivals struggle to lure them away, so it can hold its prices and margins for years.
Learn it by doing
That's Economic moat in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 15, Valuation for Investors).
Try the free lesson →Why it matters to you
Moats matter because durable competitive advantage is what lets a business compound value over the long run rather than have its profits competed away. Without a moat, high returns invite competition that drags them back to average; with one, a company can keep earning strong returns and reinvesting them for years. For long-term investors, identifying genuine, widening moats — and avoiding businesses whose apparent advantages are fragile — is central to finding companies worth holding for decades.
⚠ Mistaking a temporary lead for a moat
Being ahead today isn't the same as having a durable moat. A hot product, a first-mover position, or high current margins can all evaporate as competitors catch up — those are leads, not moats. A true moat is a structural barrier (brand, network effects, switching costs, scale) that keeps rivals out over time. Confusing a fleeting advantage for a lasting one overvalues businesses whose returns will mean-revert.