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1. What is a moat really: A moat is a company’s ability to earn returns well above its cost of capital and keep doing it for years. Two things matter. One is how large those returns are. The other is how long they’ll last before competition catches up. A company earning high returns for one or two years may just be lucky. But if it can sustain those returns across cycles, it’s probably doing something others can’t match. That’s where the moat starts to show. 2. Understand the industry first: Start with the space the company plays in. Use tools like Porter’s Five Forces to evaluate how easy it is for new players to enter, how much bargaining power suppliers and customers have, and how much rivalry exists. Some industries are brutal. Others have natural tailwinds. Know the difference. A strong player in a weak industry is not as safe as it looks. 3. Then zoom in on the company’s edge: This is where most real moats lie. Is the company winning on cost, scale, brand, or distribution? Are users locked in because switching feels hard or expensive? Does the company benefit from a network that keeps compounding? You’re looking for something that cannot be easily copied or outspent. The less replicable the edge, the stronger the moat. 4. Study how the company behaves with others: Even the best businesses can lose ground if they misread their competitive landscape. Does the firm control pricing? Does it influence how customers or partners behave? Is it shaping the ecosystem or just reacting to it? Moats are not just about what you own. They’re also about how you play the game. 5. Quantify it with actual numbers: This part is non-negotiable. Measure return on invested capital and subtract the cost of capital. The bigger the gap, the better. But just as important is how fast that gap is closing. If returns are fading year after year, the moat might already be weakening. 6. Ask the hardest question, where is it priced in: Even if a moat is real, if the market already assumes ten more years of strong returns, there’s not much upside left. The best bets are companies where the edge is durable but the market expects it to fade early. That gap between perception and reality is where returns are made.