The moat: what really protects a quality company

2026-07-07 · By Lubin Danilo, founder of Lubin Investment

The moat is what keeps a competitor from taking a company's place, even if it delivers good results today. A solid balance sheet describes the present; the moat determines whether that present will last. I always look at it alongside the numbers, never instead of them.

Key takeaways

The moat, or competitive advantage, refers to what durably protects a company from competition, even if it's profitable today.
A solid balance sheet describes a snapshot of the present; the moat determines whether that snapshot will still hold true in five or ten years.
There are several sources of moat: switching costs, regulatory licenses, network effects, brand, patents.
Without a moat, even a company profitable today can see its margins erode quickly against a new competitor.

Why numbers alone are never enough

My ten financial criteria measure what a company has achieved: its profitability, growth, debt management. But they describe a snapshot, not a guarantee for the future. A highly profitable company today, with nothing stopping a competitor from copying its model or undercutting its prices, can see its profitability collapse within a few years. That's exactly why I always look at the moat alongside the numbers, never instead of them.

The main families of moat

Switching cost is one of the most common sources of moat: once a customer has embedded a piece of software, equipment, or service into daily operations, switching providers involves cost, risk, and relearning time that discourages most customers, even against a cheaper alternative. That's the moat I described at Adobe: years of files and habits built around Photoshop and Premiere make switching software costly for a creative studio.

A regulatory license is another source, often the strongest: when a public authority allows only a limited number of players to operate, like Hong Kong Exchanges and Clearing with its stock exchange, no competitor can legally enter the market, regardless of how much money is invested. It's one of the most durable moats that exist, as long as the regulatory framework doesn't change abruptly.

Accumulated technological lead, finally, protects companies like Advantest in semiconductor testing: catching up on decades of expertise in cutting-edge technology takes time a new entrant, even a richly funded one, can't simply buy.

The trap: confusing recent good performance with a real moat

A company can show excellent results for several years simply because it was first to a fast-growing market, without any barrier durably protecting its position. As soon as market growth slows and attracts better-funded or more price-aggressive competitors, that performance can deteriorate quickly. The real moat test is asking: if a competitor with unlimited resources wanted to take this company's place tomorrow, what would concretely stop them?

How I use the moat in my method

I don't quantify the moat with a single number like I do for my ten financial criteria: it's a qualitative analysis I run for every company, concretely asking why a customer would stay loyal and why a new competitor would struggle to gain a foothold. A company that passes all my financial criteria AND has a clear, understandable moat is a far more reassuring combination than one that checks the financial boxes with nothing protecting that performance over time.

What I take away from this

The moat is the difference between judging a company on its recent past and judging its ability to defend that position ten years from now. Financial numbers tell me what a company has done; the moat helps me estimate whether it can keep doing it. Both together, never one without the other, is what lets me form an opinion on a company's real quality.

FAQ

What is a company's moat?

It's what durably protects a company from competition, even if it's profitable today: switching costs, regulatory licenses, network effects, patents, brand.

Why aren't financial numbers alone enough?

They describe a snapshot of the present, not a guarantee for the future. Without a moat, a company profitable today can see its profitability collapse against a new competitor.

What's the strongest moat that exists?

A regulatory license, like Hong Kong Exchanges and Clearing's: no competitor can legally enter the market, regardless of how much money is invested.

How do you know if a company has a real moat?

By concretely asking: if a competitor with unlimited resources wanted to take its place tomorrow, what would stop them?

Is the moat part of the 10 numeric criteria in my method?

No, it's a complementary qualitative analysis I run for every company, alongside the ten objective financial criteria.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).