Moat
A durable structural advantage that protects long-term returns on capital from competition. Sources include network effects, switching costs, intangible assets, cost advantages, and efficient scale.
A moat is a durable structural advantage that protects long-term returns on capital from competition. The five canonical sources, codified by Pat Dorsey and Bruce Greenwald, are network effects (each user makes the service more valuable to other users), switching costs (high friction to leave the product), intangible assets (brand equity, patents, regulatory licenses), cost advantages (scale, location, proprietary processes), and efficient scale (markets so small that incumbents discourage new entry). Moat strength is best quantified by the spread between ROIC and WACC sustained over a multi-year period — economic profit. We grade moat durability on a 0–10 scale within the scorecard, anchored to economic-profit history and a forward thesis explaining why the spread should persist. A wide moat is rare: by our criteria, perhaps 15–20% of S&P 500 names qualify, with the remainder being narrow-moat or no-moat. Moat durability is the single most reliable predictor of long-run shareholder returns in our experience, because it determines how long the compounding engine runs before competition arbitrages away the excess returns.