Kicking off the Morningstar Investment Conference in Chicago Wednesday afternoon was a most interesting discussion for stock pickers.
Featuring Will Danoff from Fidelity Asset Management, Christopher Davis from Selected Funds and Dennis Lynch from Morgan Stanley Investment Management, the discussion, “Ahead of the Crowd,” looked at how these famous stock pickers determined if a company had a competitive advantage and how they keep it.
Morningstar Investment Conference: Will Danoff on competitive advantages
“Believe it or not, after visiting management at 80 companies in a packed month, somehow two companies emerge as having a significant competitive advantage in their management,” noted Danoff, who engages in a qualitative assessment of the management team before investing. “We not only look at if they do what they say they will do, but are they engaged, excited, do they think long term, do they think about their customers.”
“Competitive advantage (and profit margin) is typically whittled down over time,” said the outspoken Davis. “It’s often about management. The number one thing to look for is complacency. Business models constantly change, this is the nature of capitalism. What will disrupt the company’s business model.”
Morningstar Investment Conference: Danoff on American capitalism
Determining how or when a once “solid” company might be “disrupted” was a pronounced topic of discussion, with Danoff saying it is at the core of American capitalism for small entrepreneurial companies to knock Goliath companies from their perch.
“Management doesn’t tell you when their business or industry is going to get disrupted. In many cases they don’t even know themselves,” Danoff said, as he provided an example of the largest US energy companies, who completely missed the shale explosion that transformed an industry, leaving the lions share of the early profits to be exploited by smaller and nimble firms.
“Radio station analysts and their managements weren’t going to tell you radio is dead,” said Lynch, noting that creative destruction is a part of the investing process.
Morningstar Investment Conference: Dennis Lynch likes Facebook and 3-D printing companies
Lynch said he likes Facebook Inc (NASDAQ:FB), as an example of a company with a hard to beat point of product differentiation, because of its network effect. “Our core thesis was there is a franchise in the collection of people networked together. Since the service is free, there is a high hurdle for someone wanting to switch to another network. The real competition for Facebook may come from how people spend their free time. Keeping people engaged is the key.”
Lynch also likes the 3-D printing industry and even went as far as to purchase a 3-D printer for his home to understand it, “but it doesn’t get much use.
Morningstar Investment Conference: Christopher Davis on Dennis Lynch’s idea
For his part Davis said Facebook was the only company in the history of there firm where they wrote investment thesis where they explained why they didn’t invest. Essentially they had issue with monetization. Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOGL) seemed like a better monetization method, but more significantly they considered revenue per viewer with major media such as CBS, the New York Times and found Facebook’s low low monetization per user unappealing.
Davis studied the 3-D printing market not to consider an investment but to understand how it can disrupt a business, considering it not for offense (investment) but defense (how it can impact old line business).
“Investing is knowing there will be future disruptions,” Davis said. “Unexpected enormous positive events will move the world forward. In the future, awful things will happen and so will amazing things.”