Investing Guide · Chapter 2
Understanding Moats for Long-Term Success
Learn about competitive advantages that protect companies from competition.
A moat represents what sets a business apart from its competitors and ensures its long-term success, providing protection against uncertainty and market pressures.
What is a Moat?
Like a castle's moat protects against invaders, a business moat protects against competitors. It's the sustainable competitive advantage that keeps customers coming back and competitors at bay.
The Five Types of Moats
- Brand Moat: Companies like Coca-Cola leverage strong consumer recognition and preference
- Switching Moat: High customer switching costs (e.g., Microsoft Windows)
- Price Moat: Competitive pricing advantages (e.g., Walmart)
- Secrets Moat: Protected intellectual property like patents or trade secrets
- Toll Bridge Moat: Monopolistic advantages from regulation (utilities, railroads)
Why Moats Matter
Moats enable businesses to maintain profitability during inflation by raising prices, provide long-term predictability and stability, and must be sustainable to withstand competitive threats.
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