Durability: The moat should have a proven track record of protecting the company over many years or decades.
Difficult to replicate: Unique partnerships, well-thought-out distribution routes, patents, and massive infrastructure can make it hard for competitors to imitate.
Alignment with the business model: A moat should support the company's strategy. For example, signing long-term exclusive fixed-price contracts for raw materials that can be easily and quickly substituted with cheaper ones without affecting quality and delivery time is unnecessary.
Scalability: As the business grows, the moat must grow with it. For example, if McDonald's market cap triples, but the company can no longer buy, lease, and maintain its property, its real estate advantage weakens, leaving it more exposed.
Tangible financial impact: A moat must positively impact financial metrics such as ROIC, ROE, Free Cash Flow, and others. It should protect profitability, not diminish it.
Adaptability: Moats must remain effective as the business evolves. The emergence of new technologies and unstable consumer preferences are the key factors that tackle the moat.
Barriers to entry: Investors should be able to clearly identify high entry requirements such as government licensing, strict regulations, time- and cost-consuming replicating of infrastructure, etc.

Many reputable investment funds apply this theory when building their ETPs by identifying companies with strong economic moats, such as Morningstar, Invesco, and WisdomTree.

Protecting the Castle: Economic Moats Explained

How great companies build defences against the competition.

See more on