What Buffett and Graham can teach investors about economic moats

Rather than simply searching for cheap companies, Warren Buffett increasingly focused on businesses capable of defending profits, retaining customers and compounding value over decades. He described these elite businesses as economic ‘castles’, protected by wide and durable moats.

For investors, understanding economic moats can provide a useful framework for identifying quality companies with the potential to deliver resilience, pricing power and long-term growth. For investors who can identify these businesses early and remain invested through market cycles, the ability of strong companies to compound earnings over time can become a powerful driver of long-term returns.

What is an economic moat?

An economic moat is a sustainable competitive advantage that helps a company defend its profits and market position over the long run. Some moats are obvious. Others are harder to spot.

In Australia, several companies are often considered to possess economic moats. REA Group, for example, has established a dominant position in online property listings, while Transurban benefits from owning infrastructure assets that would be extremely difficult for competitors to replicate.

Importantly, not all moats look the same. Some are built through brands and intellectual property, others through scale, customer behaviour or the structure of the industry itself. Here are some of the most common ways businesses build and maintain economic moats.

How businesses build economic moats

Some businesses build them through powerful brands that creates customer loyalty and pricing power, particularly when trust, reputation or status matter. Apple and its ecosystem are a good example of this. Others rely on intellectual property such as patents, licences or proprietary technology that competitors struggle to replicate. Visa, for instance, benefits from a network so deeply embedded in the financial system that it becomes difficult for competitors to challenge at scale.

The bigger some businesses become, the harder they are to compete against. Large retailers, manufacturers and logistics operators often benefit from lower operating costs as they grow, allowing them to offer lower prices while still protecting profit margins. Over time, these scale efficiencies can become difficult for smaller competitors to match.

Some of the strongest moats are built on customer behaviour itself. Once consumers or businesses become embedded in a software platform, payments network or operating system, switching elsewhere can become expensive, disruptive or simply not worth the effort. For companies, that often translates into recurring revenues, predictable cash flows and stronger customer retention.

Finally, certain industries naturally support only a small number of competitors. Infrastructure assets such as airports, toll roads and utilities are examples of what investors call ‘efficient scale’, where the market opportunity may not be large enough to justify significant new competition.

Is moat investing and quality investing the same thing?

Economic moats and quality investing are closely related, but they are not the same.

Many quality companies possess economic moats because sustainable competitive advantages often help produce those financial characteristics. Not every quality company has a wide moat, however, and not every company with a moat will always appear attractive from a valuation or portfolio perspective.

This is one reason Buffett’s approach evolved beyond Graham’s traditional deep value framework. Rather than simply buying statistically cheap companies, Buffett increasingly sought high‑quality businesses capable of compounding value for long periods.

Why economic moats matter for investors

For decades, investors have sought businesses capable of defending profits and compounding earnings over long periods. But even companies with strong economic moats can become poor investments if investors pay too much for them, which is why many moat-focused investment strategies consider valuation alongside business quality.

This philosophy underpins the VanEck Morningstar Wide Moat ETF (ASX: MOAT), which provides exposure to US companies that Morningstar’s equity research team believes possess sustainable competitive advantages, or “wide economic moats”.

No moat lasts forever

While businesses with durable competitive advantages can be attractive investments, no moat is permanent. Technological disruption, regulation, changing consumer preferences and poor management decisions can all weaken a company’s competitive advantage. History is filled with once-dominant businesses that failed to adapt.

Even businesses with durable competitive advantages can experience periods of weaker market performance. Market leadership changes over time, and high-quality companies are not immune to valuation compression, slower earnings growth or shifting investor sentiment.

For investors, the challenge is not simply identifying businesses with competitive advantages but determining whether those advantages can endure for years to come. This philosophy underpins strategies such as the VanEck Morningstar Wide Moat ETF (ASX: MOAT), which seeks to provide exposure to companies Morningstar believes possess durable competitive advantages.

Benjamin Graham taught investors the importance of discipline and valuation. Warren Buffett later showed that the quality of a business matters just as much. Decades on, businesses capable of defending their moat and compounding earnings over long periods remain some of the most sought-after investments in the market.

Key risks

An investment in our wide moat ETF carries risks associated with: ASX trading time differences, financial markets generally, individual company management, industry sectors, foreign currency, country or sector concentration, political, regulatory and tax risks, fund operations and tracking an index. See the VanEck Morningstar Wide Moat ETF PDS and TMD for more details. 

MOAT is likely to be appropriate for a consumer who is seeking capital growth, is intending to use the product as a core, minor or satellite allocation within a portfolio, has an investment timeframe of at least 5 years, and has a high risk/return profile.