An animated review of Why Moats Matter by Heather Brilliant and Elizabeth Collins. Although the book in parts reads like a Morningstar brochure, there’s a lot in it to learn from and I really enjoyed it.
Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?
They lay out a nice framework for assessing moats and for what to look for in each industry.
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
Investing In Stocks - Why Moats Matter
Warren Buffet coined the term most in the investment sense. The idea is that a very profitable business is like a very valuable Castle. Competitors are going to be all over it they're going to go after it. So to protect the profitable franchise a great business needs a moat. And that could come in many forms. Brands Peyton switching costs regulatory licensing of network effects there's a lot of potential moats a great brand is probably the most familiar of. It allows a company to charge higher prices than competitors get more repeat business than competitors even do boke the companies that own some of the world's greatest brands and we talk to Apple Disney McDonalds Coca-Cola have been able to earn high returns on capital for a long time because of those brands. Now having said that a well-known brand isn't enough inland companies have had while not transformed by that time. They've generally been pretty terrible business. Up until recently customers may have been aware of say American Airlines or Canada. But the airlines still found it difficult to get any kind of pricing power from that which is the key to a great brand that may have changed recently. After some consolidation and potentially more rational pricing power in the industry Creighton's are another target like a great brand. Peytons is an intangible asset. The most obvious example of this is the healthcare space. Suppose there's a disease that a big proportion of the population suffers from pharmaceutical companies may decide to study the disease closer and put it under the microscope.
Kind of like this to incentivize that research and development pharmaceutical companies drugs can enjoy Pétain protection for years before generic versions of the drug can be made by other companies. Network effects may be my favorite type of ma. This is where the value of the service increases for all users. As more people use so the value of Facebook rises for users as more people use for at least in theory it's a virtuous cycle. Once a company develops a strong network it becomes a really strong moat for the business. Sticking with the Facebook example You keep using Facebook because your friends are using it and your friends keep using Facebook because your views. Sure there are few competing social networks around but chances are Facebook owns that anyway. And for the most part it's really difficult for a new social network to convince users to try this. If users can't even find their friends on consoles. Next up switching costs a product or service has switching costs. If the cost of switching to a competing offering outweighs any potential benefit that the customer would get by switching software companies tried to create switching costs all the time. Apple tries to pull switching costs around these services constantly. Just look at the Iowa's platform. Apple users get more ingrained into the ecosystem of Apple as they buy content from the iTunes Store which isn't transferable to other devices outside of music and as they sink their digital lives on iCloud across the aisle with devices. If you're a graphic designer and you spent your whole life learning how to use Adobe Photoshop it's going to take a lot for you to switch to another product precisely because you spent years getting good at it.
Those are switching costs cost advantages is super simple to understand if you can produce a product for less than your competitor. Then you can either charge less and attract more customers or charge the same but higher margins. So a gold mining company that can mine gold for less than its competitors has a moat for example although it might not be mesclun. The last mode is efficient scaled. This is a form of cost advantage. A great example of this is a private. Suppose there's an airport in a city of a million people. The city is too small to accommodate two airports. So if you operate the only airport in town you probably benefit from a sufficient scale. You can officially serve that market alone and it wouldn't make sense for another company to come in and try to set up an airport. The book discusses each month in detail and What To Monitor when you assess each type of market. The second part of the book goes industry by industry and looks at which modes need to look out for in that industry and which modes are most common. Who gives a playbook that you can use to assess if a company is making the right strategic moves to for tech companies mode's is widening. If an oil and gas company even has a moat at all and the for restraint train is making the right moves just think about the environment we're in today. The average lifespan of an S&P 500 company has shrunk. It's gone from 61 years in 1958 to 25 years in 1980 to 18 years in 2011. Some of the world's most iconic companies are getting destroyed. Given this backdrop most are more important than ever.