What is a Wide Economic Moat

A wide economic moat is a type of sustainable competitive advantage possessed by a business that makes it difficult for rivals to wear down its market share. The term is derived from the water-filled moats that surrounded medieval castles. The wider the moat, the more difficult it would be for an invader to reach the castle. A wide economic moat can be caused by several factors that might make it difficult for other businesses to steal market share. These factors may include high barriers to industry entry, or the business with the moat might own patents on several products that are essential to providing their particular product or service.

BREAKING DOWN Wide Economic Moat

Businesses that possess at least one factor of Porter's 5 forces model would possess a wide economic moat. For example, a business that holds an exclusive patent for the creation of a miracle drug would effectively keep potential competitors out of its business. Having few or no competitors would allow the company to continually generate high levels of profit. A company that exists in a business where the start-up costs are prohibitive for small entrants would also have a wide moat. Legendary investor Warren Buffett is renowned for his philosophy of investing in businesses with a wide economic moat.