Some companies dominate their industries for years, while others struggle to stay afloat. The difference? Economic moats.
“A minority of companies enjoy long years of high returns by creating competitive advantages, one of which is economic moats. Without a moat, competition reduces a company’s returns,” Josefino Gomez, a Registered Financial Planner, told FinancialAdviser.ph
If you’re serious about long-term investing, finding companies with strong moats is key.
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What’s an Economic Moat?
The term, coined by Warren Buffett, refers to a company’s ability to maintain its edge and keep competitors out. Businesses with strong moats tend to generate consistent profits and withstand market downturns.
According to Pat Dorsey’s book, “The Little Book That Builds Wealth,” economic moats fall into four categories.
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Four Types of Economic Moats
Intangible Assets – Brands, patents, and licenses can give companies pricing power. “Brands create loyalty and exclusivity, letting companies charge a premium,” says Gomez.
Switching Costs – Some businesses are hard to leave because switching is expensive or time-consuming. Enterprise software, databases, and financial services keep customers locked in.
Network Effect – The more people use a product or service, the more valuable it becomes. Think social media, payment platforms, and e-commerce.
Cost Advantages – The lowest-cost producer often wins. Logistics, mining, and manufacturing companies benefit from economies of scale.
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How to Spot Companies With Strong Moats
“To know if a company has an economic moat, look at its track record of cash flows and returns on capital,” says Gomez. Consistently high returns suggest a lasting competitive edge.
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Why Moats Matter for Stock Performance
Over time, stock prices reflect two things:
Investment return – earnings growth and dividends
Speculative return – how the market values the company
“Companies with strong moats tend to deliver stable cash flows and outperform competitors,” notes Gomez.
The Bottom Line
A strong product isn’t enough. The best investments have durable competitive advantages. Smart investors focus on companies with lasting moats—because long-term success is all about staying ahead of the competition.
