The Might (and Myths) of Economic Moats

In this podcast, Motley Fool contributors Tyler Crowe, Lou Whiteman, and Jon Quast discuss:

• What is an economic moat?
• The prototypical model: McDonald's.
• Misconceptions about moat analysis.
• Strong no-moat businesses.
• Companies with good and bad moats.

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A full transcript is below.

This podcast was recorded on Oct. 8, 2026.

Tyler Crowe: The might and myths of economic moats. Motley Fool Hidden Gems Investing starts now. Welcome to Motley Fool Hidden Gems Investing. I'm your host. Today, we're going to change things up a little bit. As we're taping, this is actually a pre-recorded because, as you're hearing this, we are all at Fool Fest, which is annual live gathering of Motley Fool members. We do a lot of Q&A and things like that, and several of us, as well as production team, are going to be there, so we need to get something to you guys. This is a pre-recorded idea. I'm with John Quast and Lou Whiteman, as always. What we're going to do is we're going to talk about the concept of economic moats. It is a very common or a very well-trodden term that's used in financial media a lot as a way to analyze businesses. It became very popular in the 2000s. I think, John, you're going to talk about that a little bit. But I think for most beginner investors, understanding economic moats, what they're good for, why they might not be so good, and maybe some examples that will help guide people into how to use this, be a little bit helpful for them and a great evergreen content that we can do. John, I want to start with you because you were talking about a book, and I've actually got it. We can use it on video here. When you hear economic moats, what exactly are they?

Jon Quast: Economic moat. This is basically something that a business has that makes it harder for the competition to compete against it. Pat Dorsey wrote a great little book called The Little Book That Builds Wealth. In that book, it identifies four different kinds of moats. I think this is a great book to read if you're a newer investor in particular. But the four categories that Dorsey identified was first intangible assets. This could be like your brand, for example. It's not something that exists on a spreadsheet. It just exists out there intangibly. An intangible asset can be a moat, switching costs. How painful is it to switch my business from this company to that company, switching costs, network effects? Think of a marketplace that has buyers and sellers. That's a network, if a larger network is a greater advantage. And then there's also cost advantages. Some companies can actually, for example, build their product for cheaper than a competitor for XYZ, fill in the blank. These things make it harder for other companies to come in and compete against your business, and so you have a moat. It's just like you have your little castle, and around it is a body of water that prevents the night from coming over. I want to give an example that maybe we haven't even heard of before. Around the year 1,900, it was a great place to do business in Buffalo, New York, and there was a couple of reasons for that. Buffalo, New York, was able to have more reliable energy than almost anywhere in the world at that time, because of the power plant with Niagara Falls. Then there was also access to the Great Lakes by extension, the Mississippi, so you could go out west, and then you could also, through the Erie Canal, go to New York City and then the world. If you were a business building in Buffalo, New York, in around 1,900, you had cost advantages. Both on the energy side and then also on the distribution side. If you were a business trying to compete in Pittsburgh, you didn't have those advantages. It would have been hard to compete against a business in Buffalo. That's one of those things that, at that time, would have made it very hard for any company to steal business from a company that was thriving in Buffalo.

Lou Whiteman: I feel like I was called off the bench here, like wrestling style, to just be the heel or like, "Oh, we're talking moats." Let's get Lou on. But I am a moats skeptic. Especially, I love John's example there, because the thing is, is it didn't work out over time for Buffalo. That's the big thing. What we're talking about here is competitive advantages, and competitive advantages tend to not be all that permanent. When I mean moats, if nothing else, I think the concept is overused. I feel like it's like recessions. For every 10 that are declared, maybe we'll have one. I got to be honest, I don't think about moats in my investment process because I really believe that, A, they're rare, and B, they are almost impossible to identify in real time. Only in hindsight can we look back and say, "That was a moat." Look, BlackBerry had a moat; Kodak had a moat. Blockbuster had a moat. I know there's other examples, too, but if they had moats, then why, as an investor, am I focused on moats, I guess.

Tyler Crowe: Well, to your point, too, Lou, you mentioned three things. We had BlackBerry, Kodak, Blockbuster, all of which authors.

Jon Quast: There's others

Tyler Crowe: Obviously others, and we'll get to some of them as well. But it's the idea, even to your point with Buffalo as well, John, the moats do change over time. This is not like some static thing that can be held forever because there are reasons. It's almost like it has to be cared for or nurtured or maintained in some way to actually maintain it's defensible. Sometimes it can't be maintained forever. Buffalo got outproduced by other places in terms of cost and production for various reasons over time. But if we think about what John, when they work well, what are you looking for? Because like you said, they're switching. Some of these things, they exist, but they sometimes aren't as powerful. Do you have an example of when it works well, almost like an ideal situation?

Jon Quast: Well, I think that one moat that does work incredibly well is the moat that McDonald's has. I know this is a stock that we don't talk about very much, a business we don't talk about very much, and you may wonder what kind of a moat does McDonald's has? Isn't it just hamburgers? Yes and no. What many people don't realize, and there's a hidden aspect here, so it's appropriate we're talking about it on the Hidden Gems show, but McDonald's actually owns a very large percentage of the real estate. The McDonald's buildings that you see, the land that it sits on, McDonald's actually owns a very high percentage of that, whereas operations are done by independent third-party franchisees. Now, what this does for McDonald's, the parent company, is it really does matter, but not as much as it matters for other companies. What is happening in the economy. Inflation can be eating into your cost, there could be pricing wars going on, maybe people not eating out as much, all things, changing consumer habits. But McDonald's is going to get its rental check every single month from its franchisees. That is a cost that is there. It can raise prices. The value of the real estate is inflation-proof, and it's still, no matter what happens, that has value, intrinsic value. McDonald's actually generates the majority, the largest generator of revenue for the parent company is its real estate. If you are a business trying to compete with that empire, it's very hard. To that point, many restaurant businesses out there don't own any real estate. When times get a little bit tough, they still have those rents to pay every single month, and the profitability is what really gets hurt and squeezed, and they get put in a tough spot. McDonald's has a competitive advantage, as far as I'm concerned.

Tyler Crowe: Just to be that guy, because, again, I feel like I'm the foil here, I'd note that McDonald's has lost to the S&P 500 on a total return basis by 150 percentage points over the last decade. Again, as an investor, I don't know if it's the first thing I'm looking at. That's not entirely fair, I know. But look, again, as far as what I do look at, a lot of it is regulatory-related because laws are hard to change. The railroads are a great example. The railroads have some moat because ain't no way you're building new rail lines in the United States. Situations like that where just it's impossible to get in, even if it makes economic sense, maybe that leans towards moats, but even then, I don't want to get too excited about it. We definitely got a little bit more of the cranky side of the Lou today because economic moats are important to some, not always to others. To your point on regulatory ones, the ones that I tend to look for the most are that ideal regional monopolies that are often dictated by regulations, landfills, rock quarries, things like that. Waste Management and US Lime and Minerals have been, in my opinion, some of the better examples of this because you can't build a whole lot of rock quarries, landfills anywhere else, and so the economic moat there is incredibly strong. Coming out after the break, we're going to look at some of the misconceptions about moats and how investors can use them in the wrong way. John, I think it was interesting that you brought up the little bit book that built wealth at the top here. When Pat Dorsey wrote that book, he was the head of equity investment research at Morningstar. They wrote a follow-up book a few years later. It's called Moats That Matter. It was written, I think, about 2014. It is a fascinating read because you go back and look at some of the things that they said at the time. Many of the companies that they said were wide moat businesses, or companies that they really see a representative of a certain type of moat in a respective industry. I was looking through the returns of most of it, and it was really like a 50-50 shot of whether they got it right. The first one they go to is basic materials, and they said, "Nucor and BASF." Nucor has been a great business. BASF, not so great over that time period. But I think it gets to that point where moats, and what you said, Lou, earlier, is that moats can sometimes be over-inflated or misinterpreted, maybe not applied in the right way, or maybe we got it wrong in the first place. When you think about applying economic moats to your business analysis, John, how are you making sure you're not doing it wrong?

Jon Quast: Well, I think that Lou, cranky Lou, has already spoken to two of the misconceptions that I think people have about moats, and that I do want to speak to. The first being that identifying a durable moat is the same as identifying a market-beating investment. That I do not believe is the case. I think some people do think it's the case. What it really does do is identify businesses that are probably still going to be in business in 10-20 years. But being in business is not the same as creating a lot of value for shareholders from now till then. I think that is one misconception. Just because a business has a moat doesn't mean it's going to beat the market. Just because a business doesn't have a moat does not mean it will not outperform. I would say, what was Apple's moat when it first went public, compared to Microsoft. A stock doesn't necessarily have to have a moat to create a lot of value. I would say the second misconception, and this one is really important to me. It's why I'm really excited that we're talking about this today. Moats are not static, and I think this is what Lou is talking to with, in regards to Buffalo. There was a time where it was great to do business in Buffalo, but that didn't always exist that way, it changed over time. In time, Buffalo was not the only city with good, reliable energy. More states, that was a long-term trend that made it more and more able to compete in other places. I always view, personally, I view moats like this. I view all companies as either building a moat or their moat is eroding. I don't believe that any business is stuck in one place. I think even small companies, maybe it's only an inch wide, there is something that is allowing it to be in business today, and you can think of it as a moat in a way. Maybe you can step over it with ease. But it's a little sliver in the ground, that is its moat. the question is, is it getting wider? If it's getting wider, that's actually a business that really interests me. I want to know how is it actually getting stronger? How is it actually able to it's pushing its competitors further out by what it's doing today. To the converse of that, I think really wide moats can erode over time, and it can happen quite quickly in some cases. Is it getting wider? Is it eroding? I think those are the questions that investors should be asking. No does it have it or not have it, binary question. It's a spectrum, wider or smaller.

Lou Whiteman: Again, to me, this just all comes down to it's a cute word for competitive advantage. Almost every company, there aren't a lot of companies in the capitalist system that are going to survive if they don't have some competitive advantage. You back your way into either everybody has a moat, and the moat doesn't matter, or you can only see it in hindsight. But again, I just don't know how to use, Oh, I see a moat here as an investment. Especially as someone trying to look long term. Look, unless I had a window into Apple's product development, I probably would have said that BlackBerry had a moat. Go before the iPhone. I probably, until Netflix announced their plans, would have thought Blockbuster has a moat. To me, the big takeaway is that, again, I don't see much value in trying. Look, I want companies that have competitive advantages, but I don't find a lot of use, a signal and not noise, in just the whole moat discussion.

Tyler Crowe: Just to wrap it up here on the misconceptions, as with anything, business analysis, valuation, trend spotting, whatever tools you want to use, they are tools. We as investors have an investor toolbox, and using the right one for the right situation is really what matters here. There are actually plenty of, at least going back to that book, Moats That Matter, there was several industries where they're like, we just don't even see a moat. A couple examples they gave were insurance companies and trucking and shipping businesses. But if you go down the list of companies in those respective industries, you'll find a lot of marvelous businesses that have done incredibly well as publicly traded entities. When you're using these tools, whether it be using economic moat analysis or SWAT analysis, strength, weakness, opportunities, threats, things like these, they help, but they can't be a be all end all, and knowing which tools to use at any given point is really what matters the most. We're going to take this concept of the economic moat, and we're going to apply it to the real world here and try to give a couple examples of companies that we think right now are great moat businesses, and maybe once it aren't quite doing what we thought.

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Tyler Crowe: This is a stock investing podcast, and we've talked a little bit about investing theory a little bit more on the first two segments here. But one of the reasons people want to go to these podcasts is they want to hear the companies that are actually making this work. Guys, I'm going to put you on the spotlight here. When you think about economic mode as a way of analyzing a business, what to you is a company? Let's be even more specific since this is the Hidden Gems podcast. Companies in our Hidden Gems universe, in a recommendation service that we have at the Motley Fool right now, what is a company that you say has an excellent economic moat?

Jon Quast: One company that is really interesting to me in this discussion is Tiendas Tres B, or BBB Foods that this ticker symbol T-BBB. This is a Mexican corner store, and it's really competing with a lot of mom-and-pop corner stores. What is interesting to me about BBB Foods is that over 60% of its sales are private label. You start thinking through why this business work. Shoppers are looking for cheap prices, and BBB Foods is able to sell a lot of private label brands at a cheaper price to get the sale, as opposed to name-brand sales. The reason it can do this is because it has scale now because of all the stores that it has and all the purchase volume it has, and it works directly with some suppliers to get good pricing. It's a economy-of-scale kind of a business. If you're a mom-and-pop corner store, you can't compete with that pricing. It is in some senses a moat, particularly with rivals that are smaller. Now, I will say, when it comes to BBB Foods, I'm a little bit concerned with perhaps larger grocery competitors starting to move its direction because they will also command some of that pricing power, and it'll be interesting to watch what happens on price in that environment. But I would say, as of right now, BBB Foods has somewhat of a moat. I'd also put Mercado Libre in this camp. That's ticker symbol MELI. This is a company that has a marketplace, a Fintech business, yes, but the real moat here is the logistics part of the business. It can deliver in its core markets most of its stuff in two days or less. That is really hard for other companies to compete. It's something that does attract shoppers. They know that they can get their stuff really fast, and that brings more shoppers to the marketplace, which attracts more sellers. Now it's starting to feed into somewhat of a network effect. I do think Mercado Libre, as well, is a widening moat business.

Lou Whiteman: When I look, I still see durable competitive advantage in Visa and Mastercard. I know that's a weird thing to say today because the last decade or so, we've been hearing about how their moat, their advantage, is going to disappear, but they remain the digital toll road for global commerce. I don't see that changing anytime soon. I don't see crypto doing that. But look, again, I guess it's a reminder that these things do change over time, because there are the constant threats. If the threats don't come, it looks like a pretty good buying opportunity, the way they've been beaten down, I'd say. Similarly, if you look at an Apple or even a Microsoft, the painful switching costs of an operating system and the advantages of software developers all developing for your system and that critical mass, the Yogi Berra effect, that everybody goes there because everyone's there, I misquote Yogi Berra, but I do think these have proven to be durable competitive advantages. I wouldn't go so far as to say any of them are permanent moats as we've discussed, but I do think there's a lot of good businesses out there with competitive advantage.

Tyler Crowe: Certainly would take a lot more energy and inertia that we've seen so far from the crypto blockchain stablecoin environment that was purported to disrupt Visas and the Mastercards before it actually happens. It could.

Lou Whiteman: It could also Visa and Mastercard takes a lot longer.

Jon Quast: Visa and Mastercard can adapt those technologies and just bring their cost down, too.

Tyler Crowe: I also want to touch on, maybe ones that aren't quite on that economic moat analysis, what we were thinking. Again, sticking to the Hidden Gems universe, we make these decisions as a team here, and there's a couple where you guys are like the dissenting voice in the room. I'm going to give you guys the floor here. What is one of the companies in the Hidden Gems universe where, maybe despite the consensus view that we have, you guys are kind of out of consensus?

Lou Whiteman: I'm worried about Airbnb, and this is the first time I've spoken publicly about this because I am, they say, Don't marry your stocks. I got married to Airbnb. I love this business. I'm an early adopter and early investor. It's one of my favorite companies that said I am concerned about its moat. Airbnb's moat, yes, it does have a network effect, but in my view, that network effect stands on its real moat, which was an intangible asset, and that was the brand. It was the mindshare that it occupied. I believe when Airbnb went public, something like 90% of the traffic to its platform was unaided. That means that somebody sat down, says, I want to travel, and they said, I will go to Airbnb. They didn't need an ad. They didn't need a prompt. They didn't need anything. They were thinking, Travel equals Airbnb. I think that starts to become a little bit more disintermediated in what we're seeing with agentic commerce. If you are a serious vacation home owner, you're listing on Airbnb. Absolutely, that's where the traffic comes from. But all the serious ones out there, most of the serious ones out there have their own website. They would love to capture direct bookings if they could. The issue is, how do you drive traffic to your website? I think in the world of agentic commerce, someone is going to, maybe it's a OpenAI, maybe it's a cloud, maybe it's something like that. We're Gemini, even, and we're saying, 'Here's where I'm traveling. I want this, I want that." An agent is now booking. I can see a future where it's very easy for a website to integrate into that service, maybe with an API, and now we're bypassing the Airbnb platform altogether. I am worried in the world of agentic commerce, I'm worried about Airbnb's moat being able to survive.

Tyler Crowe: That is very, very timely because even though we're recording this a week ahead of time, I think as this recording is dropping, we are actually doing a theme on agentic AI in travel as part of the Motley Fool Fest coming up. An interesting, very serendipitous timing for this one, John.

Jon Quast: Here's one. I don't know if it's in our Hidden Gems universe, but it's definitely in the Motley Fool universe. I've been told my entire investing career that Fair Isaac, Ticker FICO, has emote because of that FICO score. I've been fighting this for a while, and the stock is down 60% year-to-date because Fannie and Freddie are embracing VantageScore, a competitor. I think it has been acknowledged, so I'm not. I think at Motley Fool, we're acting on this, so I don't want to say I'm a lone wolf here. This is another one that it seemed like nothing could go wrong forever. Now, I think it's lost over 75% of its value just in the last few years.

Tyler Crowe: I think Fair Isaac is one of those examples, similar to what we talked about with, like Kodak and Blockbuster, where it seemed like it was impossible to disrupt them because of reasons X, Y, Z, and the industry just kept pushing along as it went. Then, all of a sudden, something changed dramatically, and all of a sudden, that moat completely evaporated. It'll be interesting to see whether or not FICO is able to fend off the VantageScore of the world with innovation or whatever they can do to try to fend off the competition you will with that economic oh. That's all the time we have today. This has been a little bit different. I hope everyone enjoyed it, and we'll see you guys next time. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. Don't buy or sell stocks based on this. All personal finance content follows Motley Fool Editorial Standards, and it's not approved by advertising. Advertisements are sponsored content and provide for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to our producer Dan Boyd and the rest of the Motley Fool team for John, Lou, and myself. Thanks for listening, and we'll chat again soon.

Jon Quast has positions in Airbnb and MercadoLibre. Lou Whiteman has positions in MercadoLibre. Tyler Crowe has positions in BBB Foods. The Motley Fool has positions in and recommends Airbnb, Apple, BBB Foods, Mastercard, MercadoLibre, Microsoft, United States Lime & Minerals, and Visa. The Motley Fool recommends WM and recommends the following options: long January 2028 $320 calls on McDonald's, short December 2026 $45 puts on BBB Foods, and short January 2028 $340 calls on McDonald's. The Motley Fool has a disclosure policy.