I’ve always talked about economic moats. It’s central to our investment methodology. Economic moats are sustainable competitive advantages that allow companies to maintain market leadership and generate superior returns over extended periods. The wider the moat, the more likely a business can withstand attacks from competitors.

We have identified five unique types of economic moats that we actively seek in our investments.

Network effects represent one of the most powerful moat sources that we evaluate. Network effects occur when a product or service becomes more valuable as its user base expands.

Take Amazon. They’ve built a business where customers and sellers need each other. Amazon’s marketplace demonstrates network effects perfectly—as more first and third-party sellers join the platform, product selection and competitive pricing improve for customers, which attracts more shoppers, and in turn draws more sellers. In the same way, Google’s search engine becomes more valuable with each query, as its algorithms learn and improve from user behavior, creating better search results that attract more users and advertisers, further strengthening its competitive position. That’s a moat that keeps getting wider. Moreover, Amazon and Google are reinvesting profits to make that moat even deeper by developing their cloud and AI services.

Cost advantages represent another critical type of competitive moat. Businesses that have cost advantages can produce goods or services at a relatively low cost. They can undercut their competition on price or sell at a higher profit margin. Some common drivers of cost advantages include economies of scale, access to low-cost resources, and technology.

Costco demonstrates this advantage through its massive scale and membership model. By operating on razor-thin margins and generating stable profits from membership fees, Costco can consistently offer lower prices than competitors. Cintas demonstrates another aspect of cost advantage through its route density in uniform and facility services. As they add customers along existing routes, their cost per stop decreases, allowing them to offer more competitive pricing while maintaining strong margins.

Switching costs represent a third type of moat we value highly. Switching costs refer to the inconveniences or expenses customers incur when transitioning from one product or service to another. These costs are considered high when customers are reluctant to switch due to the significant time and financial investments required. As a result, businesses can benefit from high customer retention rates and exercise greater pricing power.

Microsoft’s enterprise software ecosystem demonstrates this advantage effectively. Once organizations have integrated Microsoft’s suite of products into their operations and trained employees on these systems, the cost and disruption of switching to alternatives become prohibitive. Similarly, Danaher’s life sciences and diagnostics instruments become deeply embedded in customer workflows, with scientists building research protocols around their equipment and software, making it extremely difficult to switch to competing products. This inherent “stickiness” in Microsoft’s and Danaher’s offerings result in high switching costs and sustainable pricing power.

Intangible assets constitute our fourth moat category. Intangible assets include brands, patents, trademarks, and regulations that create higher barriers to entry and prevent competitors from duplicating a good or service. These assets often translate into enhanced pricing power and customer loyalty.

Apple’s brand power serves as a prime example, with its reputation for premium quality and innovation allowing it to command higher prices and maintain industry-leading margins. LVMH similarly leverages its portfolio of luxury brands, including Louis Vuitton, Christian Dior, and Moët Hennessy, to maintain pricing power and customer loyalty across various luxury categories. These heritage brands represent intangible assets that cannot be easily replicated.

Efficient scale represents our final moat category. In industries that demand substantial capital investments, businesses with significant financial resources gain a competitive advantage through efficient scale and high barriers to entry. The extensive capital requirements necessary to operate in these sectors effectively limit the number of potential new entrants.

Blackstone’s large scale in private equity, real estate, and credit markets creates significant barriers to entry. Its size allows it to pursue larger deals that smaller competitors cannot, while its extensive network and proven track record make it a preferred partner for institutional investors. Similarly, Canadian Pacific Kansas City benefits from efficient scale due to the immense infrastructure and capital requirements needed to operate a transcontinental railway network across Canada, the United States, and Mexico.

We pay particular attention to companies that exhibit multiple moat sources, as these businesses often prove the most resilient over time. Microsoft embodies this combination, benefiting from switching costs in its enterprise software, network effects in its cloud platform, and intangible assets through its brand and patent portfolio. In the same way, Costco demonstrates the strength of multiple moats through its cost advantages in bulk purchasing, network effects between its member base and vendor relationships, and intangible assets in its trusted Kirkland Signature brand, which together create a powerful competitive edge.