What is a moat in investing?
A moat is a lasting advantage that protects a company's profits from competitors, the way a moat protects a castle. Warren Buffett made the term popular, and it is one of the main things value investors look for.
Why it matters
High profits attract rivals. Without a moat, competitors copy the product or cut prices until the profits shrink. A company with a moat can keep earning good returns for many years.
Common types
A trusted brand that lets a company charge more. Network effects, where a product gets more useful as more people use it. Switching costs, when changing to a rival is costly or a hassle. A cost advantage that lets a company sell cheaper than anyone else. Patents or licenses that keep others out.
How to spot one
Look for a long record of high profits on the money the business invests, steady prices even when rivals push, and customers who stay year after year. If the business has stayed strong through tough times, that is a good sign.
Limits
Moats can shrink. New technology, new rivals, or changes in rules can wear down an advantage that once looked safe. A great business can also be a poor investment if you pay too much for it.
Frequently asked questions
Who came up with the idea of a moat?
Warren Buffett popularized the term in his letters and talks, describing businesses protected by a wide moat.
Does a moat make a stock a good buy?
Not by itself. The price still matters. Many value investors want both a strong moat and a sensible price.