How we think about moats

Most investing advice starts with the price. We start with the business — and the single question that matters most over a decade: can this company keep earning high returns on capital without inviting in everyone who wants a piece of it?

That is what a moat really is. Not a brand, not a logo, not a charismatic founder. A moat is a structural reason that a company's profits survive contact with competition.

Four moats we actually trust

Warren Buffett popularized the metaphor, but the useful work is in the classification. We weight four sources of durable advantage:

1. Switching costs. Once a hospital runs its records on your software, ripping it out risks lives and millions of dollars. The product doesn't have to be the best — it has to be expensive to leave.
2. Network effects. Each new user makes the product more valuable to every other user. Marketplaces, payment rails, and developer platforms live here. The advantage gets wider with scale, not thinner.
3. Cost advantages. Sometimes geography, scale, or a process gives one player a structurally lower cost to serve. They can price where rivals lose money.
4. Intangible assets. Patents, regulatory licenses, and genuine brand pricing power — the kind where customers pay more for the same physical good.

If we can't name which of these four a company has, we assume it has none.

The test that cuts through the story

Anyone can tell a moat story. The numbers are harder to fake. We look for:

• Return on invested capital that stays well above the cost of capital for five-plus years. A single great year is luck; a decade is a moat.
• Stable or rising gross margins through a downturn. Pricing power shows up when customers don't leave even when money is tight.
• Market share that holds without the company buying it through ruinous discounting or acquisitions.

A moat you can see in the income statement is worth more than a moat you can only hear in the earnings call.

Why this matters for patient investors

If you trade in and out every week, moats are irrelevant — you're betting on the next print. But if you intend to own a business for years, the moat is the whole game. It's the difference between a compounding machine and a melting ice cube that happened to look good when you bought it.

We'd rather own a wonderful business at a fair price than a fair business at a wonderful price. The moat is how we tell the two apart.

Nothing on this page is investment advice. We write about how we think, not what you should buy.