Moats... What are they?

You maybe thinking medieval defenses now. Well, you're not that far off - moats are defenses, but rather economic defenses. The term "economic moat" refers to the competitive advantage a company might have in the market. The more sustainable and long-lasting the moat is the "wider" it's considered to be. Analysts usually classify companies as having a moat that is "wide", "narrow", or "none."

Competitive advantages that can be considered moats vary widely between industries. Some examples of economic moats are: patents (Pfizer); copyrighted materials and intellectual property (Microsoft); economies of scale unmatched in the industry (Wal-Mart); high-cost of switching to a competitor (think 2-year AT&T wireless contract with free calls to all your friends who are on the same network); powerful brand (Coca-Cola).

It is through wide moats, or sustainable competitive advantages, that companies are able to outperform the overall market and post great return over long periods of time.