The laws of capitalism all but guarantee that high profits in relation to capital employed will be competed away over time as new entrants attack. To prosper, a business needs a fortress. And it needs a wide (and widening) moat around that fortress to fend off today’s armies of competition while having the foresight to adapt to new attacks it will face in the future. We are moat investors. We are looking for those select few companies that can defy the gravities of capitalism by earning above average returns on capital for extended periods of time. These are unusual creatures, they are not static (that is, their economic defenses are usually shrinking or expanding), and identifying their durability requires sound judgement. There are four broad categories of advantages that permit companies to betray economic decay—each have their own strengths, and on occasion the presence of one helps create a second.


Cost Advantages

Processes that are done more efficiently than competitors or produced at such scale that per unit costs are lower than competitors

Intangible assets

Perception-based or legal barriers such as patents, brand names, or licenses that endow a company with the privilege of selling a product or service at a higher price than potential or existing competitors

Switching costs

When actual or perceived costs (time, money, mental anguish) of switching from an incumbent product or service would be prohibitive

Network effects

A product or service that increases in value as more customers use it