By Diana Gordon*
“In business, I look for economic castles protected by unbreachable 'moats'.” - Warren Buffett.
You can tell a deep value credit person a mile away. We almost always cite Warren Buffett as our wannabe mentor. We like nothing better than investing in strong boring businesses that provide a necessary function with solid long- term management teams, thoughtful strategies and reasonable balance sheets. We have a mantra on our desk "boring is good." Even beautiful. Most business books are unreadably awful but I loved Buffett's biography The Snowball, and my dad's favourite book by Buffett's mentor, Benjamin Graham, The Intelligent Investor. If you only read two business books...
With that in mind and not owning either the shares or the bonds, I checked out Tesla CEO Elon Musk's remarkable first quarter conference call the other day for entertainment. In it, after a while, he basically blew off a couple of Wall Street analysts and went to twitter crowdsourced investor questions. Now I've been listening to dry conference calls for 25 years and the general sycophancy that comes with it: "Great quarter guys!" And my personal favourite just prior to the GFC: "Uh, given you are, uh, arguably underleveraged..."
With no skin in the game, I found Musk's remarks less stunning than news outlets made them and in tune with my own views that the investing landscape could do with a freshening up. But it was his antithetical to Buffett's view on moats, (a competitive advantage that one company has over other companies in the same industry), that struck me most. And, reluctantly, I think there might be some truth in it.
"First of all, I think moats are lame," Musk said. "They're like nice in a sort of quaint, vestigial way. But if your only defence against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness."
When I look back on the mistakes I've made investing it's being either too early - great being underweight but why on earth did I lend to any of those telecom start-ups at all? Or a too rear-view approach - local business owners need to keep advertising in the (boring, stable) Yellow Pages right? Anchoring bias. Got to love it.
However, I've also been lucky to have spent most of my career investing at a time that has seen the vast consolidation of multiple industries from an average of six players to three. That has given a whole host of companies moat-like pricing power and has made for a great investing environment for a deep value credit investor. So it’s quite a mind-shift to believing that those moats are now only illusory.
That's because the pace of change is accelerating so fast that larger consolidated companies may finally be at a disadvantage in their inability to adapt fast enough. When 5G telephony is rolled out, the value of that precious cable connection into the home is going to come down fast. Yes, you can consolidate with wireless telcos but that only holds back the barbarian armies for a while. Tech and pharma giants recognise this and have been using their considerable balance sheets to buy the competition.
I do wonder if this will continue to be a successful strategy as we accelerate ever faster. One of the other moats is the ever-growing cost of compliance that larger companies can amortise over a larger revenue base. However, that cost is coming down fast now as nimble tech start-up businesses help automate previously cumbersome processes, eliminating bureaucracy. Will the larger companies be able to keep up with a level playing field?
Finally, in the war for ideas and talent, the smart kids nowadays just aren't that into hierarchies, suits and ties and working their way up the corporate ladder in companies who feel they have some metaphorical moat that gives them time to adapt. The up-and-coming generation know they don’t have that luxury, but will they?
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*Diana Gordon is head of fixed interest at KiwiWealth.
This article reflects the personal views of the author at the date shown above. The information provided, or any opinions expressed in this article, are of a general nature only.
8 Comments
Very often the business model for these "nimble startups" is not so much to turn a profit but to attempt to be bought out by larger companies by paying for the smartest marketers, spin doctors and the finest creative accountants. Ka-ching.
Initially they are privately (bank) owned so there is not really an opportunity to invest in them at such an early stage.
I guess there are crowd funded ones, but crowd funding seems to have died away a bit now.
Whatever, its all very risky stuff.
Musk is a speculator. Intelligent investor by Benjamin Graham makes clear the difference between speculation and investing. Even talks of 'intelligent speculation ' if I recall correctly.
As a robust way to grow wealth investing is the way to go.
As a necessary requirement for innovation speculation must have it's place as how can anyone ever try (invest either time/ money) anything new if it first must have a proven track record.
Favorite quote from Graham is the one along the lines of 'you're not right or wrong because others agree or disagree with you; you're right because you're facts and analysis is right '.
In a time where opinion is constantly passed off as fact in media (social media) , this quote is important to remember
These views are copacetic. Mr. Musks view tends to prevail in new industries (electric vehicles, electronic financial intermediaries etc.) whereas Mr. Buffett is interested in well established industries (soft drinks, insurance.) Pat Dorsey (Director of Research at Morningstar) wrote an excellent book about these views, well worth a read.
I really find it hard to see why this article was deemed worthy of inclusion in this forum.
It suggests that Buffett has a moat as the sole criteria on which he bases his investment decisions and that is not the case. His record over many decades is sufficient testament to that. It is one-and an important one-of a number of criteria used by Berkshire Hathaway.
The article fails to appreciate that innovation is in fact one form of moat. take F&P H'care.. It presents potential competitors with barriers to entry-a moat-through constant innovation. Other companies have different moats-think of Auckland Airport or POT and i can think of several others.
Elon Musk has many qualities and is a true disruptor,but will Tesla ever be profitable,indeed,will it survive? I'll stick with Buffett and his moats.
... it is that age old debate of investors between the respective merits of growth ( Elon Musk ) versus value ( Warren Buffett ) ...
Some of us believe that without growth , there'd be no concomitant disruptive technologies , no boom and bust industries , and hence , nowhere for the value investors to play ...
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