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What Is Your Moat?
Posted by: Grahamites (IP Logged)
Date: May 6, 2014 04:57PM
During the Value Investor Conference held just before Berkshire Hathaway's annual shareholder meeting, I had the opportunity to hear from some of the best investors in the value investing field. One thing I observed during the conference is that they all claim that they are different from other investors and it is the difference that produces the superior returns.
In investing, we talk about moats of a business such as pricing power, low cost producer, etc. And we talk about the sustainability of the moats. If a business has sustainable moat, it is likely to generate better returns than a business without a sustainable moat. I think the same concept applies to investing, with a little tweak. We can all agree that in order to beat the market, an investor has to have some sort of moat, or an edge, against other investors. It could be an information edge; it could be a combination of quantitative analysis and qualitative analysis; it could be investing in net-nets. The list of possible moats can go on and on.
If we think about it, this is interesting. Every speaker's track record is indeed better than the markets although their styles differ. But why is that? If their methods can produce superior returns, why can't every investor just copy a style, or all of the styles, and beat the market happily? This question fascinates me.
I'm not sure if I know the answer to this question, but here is what I think is the partial answer to this intriguing question: They beat the markets because they find a moat that fits their set of skills and personalities and they work hard to keep the moat intact over a very long period of time, while being attentive to the competitive environment in the investing field.
Let me use an example to illustrate my point. One of the speakers, Paul Lountzis, who has a fabulous track record, spoke on the topic of "generating differential investing insights." He pointed out that his moat is his information edge, which he has gained over the years by meeting and talking to the managers of the companies he is interested or has invested in. He also talks to competitors and customers. He spends a lot of time doing the scuttlebutts work.
I think that's a remarkable approach. However, not everyone is wired to take that approach. What if you are very shy? What if you don't feel comfortable talking to upper management? What if you don't like traveling? What if you are just not good at asking the probing questions that will get the most out of an interview? The point is, if you are not comfortable with this approach, move on to find another approach that you are more comfortable with. If you decide to adopt this approach even though you are not comfortable with it, unless you can manage to get more comfortable in the future, you are at a huge competitive disadvantage to Paul Lountzis.
Another speaker, Sarah Ketterer (Trades, Portfolio), talked about how her firm has been generating better returns by combining quantitative analysis with qualitative analysis. Although her firm equates risk to a large extent to volatility, which didn't resonate with the audience, her returns have been good. And there are other funds that utilize this approach to investing. This approach may not resonate well with value investors but it fits well with the investors who are more comfortable with the quantitative risk analysis. On the other hand, I wouldn't adopt her approach even though, if used properly, it can be a sustainable moat.
I hope by now I have made my point clear. It is enormously important for an investor to find a moat that fits their skill set and personality. And once the investor finds it, he or she should be relentlessly focused on sustaining and widening the moat. It's not complicated but it's also not easy.
Guy Spier once said that he would be a lousy Bill Ackman (Trades, Portfolio) or Warren Buffett (Trades, Portfolio) but he will be a hell of Guy Spier. This is a fantastic message. You will be a lousy Bill Ackman (Trades, Portfolio) or Guy Spier as well. But if you know yourself well, you can be a hell of yourself. And that could be a fantastic discovery.
Guru Discussed: Bill Ackman: Current Portfolio, Stock Picks
Sarah Ketterer: Current Portfolio, Stock Picks
Stocks Discussed: SPY, DJI, QQQ,