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AGM Alts Weekly | 11.16.25: Know thy moat

AGM Alts Weekly #129: Making private markets more public, every week.

Nov 16

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Good morning from Washington, D.C.

Moats are far from a new topic in business.

They have been studied at length.

They have been analyzed by many, including by some of the foremost experts in investing and behavioral finance such as Head of Consilient Research at Morgan Stanley Investment Management’s Counterpoint Global, Michael Mauboussin, as he did in this 2024 paper.

They have been used as a framework for investing by the world’s legendary investors, like Warren Buffett, who said of moats: “We think of every business as an economic castle. And castles are subject to marauders. And in capitalism, with any castle . . . you have to expect . . . that millions of people out there . . . are thinking about ways to take your castle away. Then the question is, “What kind of moat do you have around that castle that protects it?”

Morningstar even has an “Economic Moat Rating” that its research team awards to companies to assess its durable competitive advantage and “predict its ability to fend off competitors and generate high returns over time.”

Morningstar identifies five key features of moats:

Switching costs are obstacles that keep customers from changing between products, like from one company’s product to a competitor’s.

Network effects occur when the value of a good or service increases for both new and existing users as more people use it.

Intangible assets are things such as patents, government licenses, and brand identity that keep a company ahead and competitors at bay.

A company with a cost advantage can produce goods or services at a lower cost, allowing it to undercut its competitors or achieve higher profitability.

Efficient scale benefits companies operating in a market that only supports one or a few competitors, limiting rivalry.