Unrepeatable Moats
A blog I read, csinvesting, has a post about Niche vs. Moat. In my experience, most investors underestimate the frequency of moats and overestimate their size. They assume large companies have moats and small companies don’t.
Most competitive advantages are cost advantages. And most of those don’t last. But they keep excess profits in and competition out for a time.
Cost advantages are inflexible. And so any change in technology, society, industry structure, etc. can destroy them. What’s worse is that the cost advantage often reverses from something that favored incumbents to something that favors entrants. You end up with unions, agents, etc. New entrants do not.
Greenwald stresses the local nature of moats. Local competitive advantages are common. If you look at very high return businesses in areas you wouldn’t expect – banks, grocery stores, etc. – they are due to superior performance at the most local level. Each store and branch is outperforming. And the market share situation in each town deters competition.
Most investors don’t consider that a moat. Because it can’t be repeated. In the next town over, it’s useless.
That’s true. But it’s also different from a big company making a hit tech product. They have nothing that can be defended. The profits are due to scale. But the scale – market share – is threatened by something others can and will try to take away.
There’s a book – in fact a whole series – on repeatability.
You shouldn’t read Greenwald’s book without reading Zook’s books. I recently read another book on moats – The Little Book That Builds Wealth – and it makes the same mistake Greenwald’s book makes.
They both downplay management. On the one hand, they are right to do this. Management is not a moat. On the other, they are wrong. Management often grows a culture around a moat.
In fact, today’s management is often less important than the management that formed the company’s identity. Day to day decision making is not important. Keeping the company focused on the moat is. The key manager doesn’t have to be alive to do that. People just have to remember him.
The most durable advantage a company can have is a cultural identity locked up in a moat. Most companies should not try to be cost leaders in everything they do. But if that is your moat – you shouldn’t spend a minute thinking about anything else.
The reason Southwest (LUV) and Wal-Mart (WMT) built the moats they built is due to the cultures their management created. They had one good idea. And they took it seriously.
Most companies are more scatter brained. If they see a good idea, they act on it. But ideas do not exist in isolation. A chain of good ideas often leads to one really bad habit.
Most companies that have moats are not conscious of those moats. Warren Buffett invested in the Washington Post (WPO). The people at the Washington Post knew how …
Read more