I think about this all the time. I invest in small and micro companies. My dream is to find one establishing a moat! It is a very interesting intellectual exercise
That’s where I think a lot of value can be found, but the market will also put large names on sale from time to time--consider Google at the start of 2023. Beaten down, but undeniably an owner of one of the greatest moats in existence. Cheers and thank you for reading!
Wonderful post! Incredibly insightful. Personally, I acknowledge that I might never consider myself smart enough to identify future competitive moats. Therefore, I stick to the classic method of seeking established moats and investing in companies at a reasonable or bargain price when the opportunity arises. As a devoted value investor, I don't make numerous buying decisions. Over the past two years, my only choices were Meta and Adobe. Interestingly, their value surged rapidly, becoming overvalued again quite swiftly, leading me to sell out in an unusually short period.
I think its tough, with a wide margin for error, looking for yet-to-be-cemented moats. Dispersion of outcomes is wide. Existing moats can persist for decades though, so no harm in just looking for those either.
I completely agree with the possibility. However, when focusing on emerging moats, it becomes even rarer to find a solid opportunity where you can confidently say it's a strong buying prospect. I'd also like to highlight that many companies assumed to possess a moat (like Apple or Google) took quite some time to build it. I might even argue that consumers play a crucial role in constructing that moat. People, myself included, are drawn to iPhones due to their simplicity and ease of use, often making emotional purchases and rationalizing them later. While Apple effectively leveraged its hardware platform and the App Store, consumers undeniably contributed to building the company's moat. The same principle applies to brands like Coke or Gillette in my opinion. Generally speaking, qualitative analysis holds just as much importance as quantitative analysis. If you're interested in exploring this further, I've recently published a post on my relatively new Substack.
Businesses whose assets are intangible and difficult to replicate have a wide moat. These businesses do something very unusual: they break the rule of mean reversion that states returns must revert to the average as new capital is attracted to business activities. As such they earn super-normal returns. Microsoft and Coca Cola are great examples. Moreover, it’s hard for companies to replicate these intangible assets using borrowed funds, as banks tend to favour the (often illusory) comfort of tangible collateral.
The return on intangible assets is higher as they are mostly funded with equity not debt and attract an appropriate return. Lenders seem to crave the often false security of lending against tangible collateral. Intangible assets can also last indefinitely if they are well maintained by advertising, marketing, innovation and product development and the duration of an asset is an important factor in figuring out its real returns. This is an important factor when looking at moats that many don't see.
Great write-up! t's hard work and needs deep thought to find a developing MOAT. On the quantitative side we can look at ratio's that improve over time. On the qualitative side, I think Nick Sleep detected a MOAT in Amazon before others did by understanding the business model just a little bit better.
I think about this all the time. I invest in small and micro companies. My dream is to find one establishing a moat! It is a very interesting intellectual exercise
That’s where I think a lot of value can be found, but the market will also put large names on sale from time to time--consider Google at the start of 2023. Beaten down, but undeniably an owner of one of the greatest moats in existence. Cheers and thank you for reading!
The exciting thing about that is one stock could generate a substantial sum of your lifelong returns if held for a long time.
Absolutely, as Warren Buffett famously said, you only need a few stocks to become very wealthy in this life.
Wonderful post! Incredibly insightful. Personally, I acknowledge that I might never consider myself smart enough to identify future competitive moats. Therefore, I stick to the classic method of seeking established moats and investing in companies at a reasonable or bargain price when the opportunity arises. As a devoted value investor, I don't make numerous buying decisions. Over the past two years, my only choices were Meta and Adobe. Interestingly, their value surged rapidly, becoming overvalued again quite swiftly, leading me to sell out in an unusually short period.
Thanks for reading and for the kind words! Agreed, having a value bent means slim pickings a lot of the time!
Thanks for the kind words!
I think its tough, with a wide margin for error, looking for yet-to-be-cemented moats. Dispersion of outcomes is wide. Existing moats can persist for decades though, so no harm in just looking for those either.
I completely agree with the possibility. However, when focusing on emerging moats, it becomes even rarer to find a solid opportunity where you can confidently say it's a strong buying prospect. I'd also like to highlight that many companies assumed to possess a moat (like Apple or Google) took quite some time to build it. I might even argue that consumers play a crucial role in constructing that moat. People, myself included, are drawn to iPhones due to their simplicity and ease of use, often making emotional purchases and rationalizing them later. While Apple effectively leveraged its hardware platform and the App Store, consumers undeniably contributed to building the company's moat. The same principle applies to brands like Coke or Gillette in my opinion. Generally speaking, qualitative analysis holds just as much importance as quantitative analysis. If you're interested in exploring this further, I've recently published a post on my relatively new Substack.
I agree with everything said. Great points.
MOATS
Businesses whose assets are intangible and difficult to replicate have a wide moat. These businesses do something very unusual: they break the rule of mean reversion that states returns must revert to the average as new capital is attracted to business activities. As such they earn super-normal returns. Microsoft and Coca Cola are great examples. Moreover, it’s hard for companies to replicate these intangible assets using borrowed funds, as banks tend to favour the (often illusory) comfort of tangible collateral.
Amen to that sir. Agreed.
The return on intangible assets is higher as they are mostly funded with equity not debt and attract an appropriate return. Lenders seem to crave the often false security of lending against tangible collateral. Intangible assets can also last indefinitely if they are well maintained by advertising, marketing, innovation and product development and the duration of an asset is an important factor in figuring out its real returns. This is an important factor when looking at moats that many don't see.
Great write-up! t's hard work and needs deep thought to find a developing MOAT. On the quantitative side we can look at ratio's that improve over time. On the qualitative side, I think Nick Sleep detected a MOAT in Amazon before others did by understanding the business model just a little bit better.
Sounds so easy in retrospect, but so few people did it that it shows the reality of the difficulty. Thanks for reminding me to read more Sleep.