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  • Dan WilsonDan Wilson Member
    Post count: 15

    Hi All,

    What is your opinion on MOATs?

    Does it have to be something as precise as a brand name, secret recipe or patent or can the management be a moat?

    For example:

    Lets say a business has 0 debt, cash on the books and a higher earnings % compared to its industry competitors would this not be considered a ‘short term’ moat as well?

    I know these metrics can change and the business could become unprofitable or start to take on excessive debt, but this could be seen in the quarterly reports and give the investor time to get out of that position.

    All feedback is appreciated.

    Thanks,

    Dan

    1 user liked this post.
    Sergio FelerSergio Feler Senior Member
    Post count: 28

    Hi Dan,

    I understand 0 debt, cash on the books and a higher earnings % compared to its industry competitors are not concepts classified as Moats.

    The following concepts are moats:

    Switching Cost, Brands, Patents, Network effects and Cost advantages (which are not higher earnings).

    Regards,
    Sergio

    1 user liked this post.
    Rajiv RenganathanRajiv Renganathan Moderator
    Post count: 154

    Hi Dan, Sergio

    Interesting topic. In my opinion, moat is anything that enables a company have an advantage over competitors. The question is how sustainable is it. For example “first mover advantage” is a moat but not sustainable in most cases (there can be exceptions ofcourse). Will I invest based on this moat?

    As investors, we look for moats that sustain for long periods of time. Good list from Sergio. Its described well in the book The Little Book That Builds Wealth by Pat Dorsey.

    Moats based on capital efficiencies are prone to the below cycle. Investors who are able to learn from own or other’s experience/mistakes are in a better position to recognize if a moat can sustain through this cycle. If so, it would qualify as long-lasting.

    As an investor in Indian markets, the moat I am after is “management quality” i.e honest, smart and uncanny capital allocators. This could also be termed as a risk (key man risk). The reason I say this is to highlight that some moats could be how we view them.

    Looking forward to hear more and from others.

    Regards
    Rajiv

    “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
    ― Charles MacKay, Extraordinary Popular Delusions & the Madness of Crowds

    3 users liked this post.
    Dan WilsonDan Wilson Member
    Post count: 15

    Hi Sergio and Rajiv,

    Thank you for your replies on this topic.

    I agree with the list of moats provided by Sergio and I like to think of these as classic Warren Buffett moats, which I imagine are very difficult to find in undervalued companies.

    I will definitely read the book you recommended Rajiv, so thank you for the detailed reply and book recommendation.

    The company I am looking into at the moment relies on a part government funded scheme for approximately 30-35% of its revenue, this scheme will continue until at least 2021, but with no guarantees that it will be extended.

    Most of its larger competitors rely on this scheme for >50% of their revenue, would you consider this as a potential moat?

    If the scheme is cancelled then they will be the least affected out of the competitors I have looked through as of yet.

    I understand this may be a difficult question to answer without the specifics.

    Thanks,

    Dan

    Rajiv RenganathanRajiv Renganathan Moderator
    Post count: 154

    Hi Dan

    To keep it straight- I wont consider that a moat that is good enough to consider for investment.

    Having said that, it is equally important moats are under-priced. If a moat is well-known and priced accordingly, then it would not make a good investment at that price. In such cases, I wait for “market crashes” when they all fall down and discerning investors (who manage to stay sane!) can make buys at prices with “margin of safety”.

    Regards
    Rajiv

    “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.”
    ― Charles MacKay, Extraordinary Popular Delusions & the Madness of Crowds

    1 user liked this post.
    Dan WilsonDan Wilson Member
    Post count: 15

    Thanks Rajiv!

    I appreciate the advise.

    Thanks,

    Dan

    1 user liked this post.
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