Some companies seem unstoppable—until they aren’t. Blockbuster ruled movie rentals. Nokia dominated cell phones. Kodak was synonymous with photography. Then, almost overnight, they crumbled.
What separates the businesses that endure from those that fade away? It’s not just luck. It’s something Warren Buffett calls an economic moat—a powerful advantage that keeps competitors at bay and ensures long-term success.
If you’re managing U.S. assets from abroad, understanding how economic moats work is essential. That’s because investing in companies with real staying power can mean the difference between steady growth and sudden losses.
What Is an Economic Moat?
Think of a castle with a moat. The wider and stronger the moat, the harder it is for invaders to break through. In business, a company’s “moat” protects its profits and market dominance.
Some companies build moats through brand loyalty (Coca-Cola), enticing customers to choose their products over cheaper options. Others use cost advantages (Costco), selling at prices competitors can’t match. Network effects (Google) create moats by making their platforms more valuable as more people use them.
Why Moats Matter for Your Portfolio
Many investors chase stocks that may crash when competition heats up. Companies with strong moats, however, can weather downturns and maintain growth over decades. Investing in companies with moats provides a hands-off strategy that reduces risk and builds stability.
How to Spot a Strong Moat
Before investing, ask yourself:
- Do customers keep coming back? Strong brands make switching difficult. (Can you even imagine switching from your Apple phone to Samsung?)
- Would leaving be a hassle? Companies with high switching costs keep customers locked in. Imagine the headache involved in switching automatic bill paying from one bank to another.
- Are they market leaders? Businesses with dominant supply chains or unique technology tend to outlast rivals. Did brand come before price in buying your last major appliance?
Even great companies can lose their edge. Regularly reviewing your portfolio can help you identify weakening companies before they become liabilities.
Diversifying across companies with different moats, focusing on long-term potential, and staying informed about market trends can help strengthen your portfolio.
Want to become a smarter investor? Listen to The Goldstein on Gelt Show episode, “Cracking the Code of Economic Moats,” to learn more about spotting companies with staying power.
The author may own mentioned securities; this is not a buy/sell recommendation.
Douglas Goldstein, CFP® is the director of Profile Investment Services, Ltd. www.Profile-Financial.com. He is a licensed financial professional both in the U.S. and Israel. Call (02) 624-2788 for a consultation on how to set up your American assets to meet your financial goals. Securities offered through Portfolio Resources Group, Inc. Member FINRA, SIPC, MSRB, FSI. The opinions expressed are those of the author and not those of Portfolio Resources Group, Inc. or its affiliates. Neither PRG nor its affiliates provide tax or legal advice.
Published May 14, 2025.