Excel Add-In GURUF
API
My Portfolios
Create New Portfolio
Portfolio Contest
My Gurus
Personalize
My Gurus
Bookmark
Print
This page was added to your A few days ago, fellow GuruFocus contributor John Engle asked the question: Are Warren Buffett’s Strategic ‘Moats’ Unethical?
Engle was commenting on the recent spat between Warren Buffett (Trades, Portfolio) and Elon Musk over the notion of business moats. As I have discussed previously, Musk started this argument before Buffett responded to the Tesla (NASDAQ:TSLA) founder's attack on strategic moats, which he believes are "lame" and "sort of quaint in a vestigial way." After Buffett responded to Musk's assertations at the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) meeting, Musk then continued the argument on Twitter, eventually making a claim that "moats are essentially unethical, sheltering oligopolies from the competition."
- Warning! GuruFocus has detected 5 Warning Signs with BRK.A. Click here to check it out.
- BRK.A 30-Year Financial Data
- The intrinsic value of BRK.A
- Peter Lynch Chart of BRK.A
This isn't the first time Buffett's love of moats has been attacked. Berkshire Hathaway has been criticized for its business practices, which seemed to put profit over customers, particularly at its Clayton Homes division.
The key differences
In his article, Engle notes there's an essential distinction between moats and oligopolies. Specifically, he writes: "Moats are maintained through excellence of product or service while oligopolies are sustained through price-fixing and manufactured structural barriers to entry."
It could be argued that some of Buffett's businesses fall into the latter category.
The classic example of this is Buffett's Buffalo Evening News, which he originally purchased in 1977. For several years, this business struggled to compete with its primary competitor, Buffalo Courier-Express, but eventually, Buffett prevailed by launching a Sunday edition and finally taking over the entire market. You could argue the Buffalo Evening News built its moat by investing more in its content, but that would leave out a large part of the story. Buffett used a significant amount of money and influence for the rest of his empire to help transform the business, cut costs and fight legal battles. Trying to compete against this would certainly qualify as "manufactured structural barriers to entry."
Other businesses in the Buffett empire exhibit similar traits. Clayton Homes, for example, the largest builder of modular and manufactured homes in the United States, has been accused of relying on "predatory sales practices, exorbitant fees and interest rates that can exceed 15 percent, trapping many buyers in loans they can’t afford and in homes that are almost impossible to sell or refinance." Evidently, if the company were looking to expand its moat naturally, it would be trying to achieve the best reputation and results for customers rather than price gouging -- a tactic only the largest nonopoly businesses tend to get away with.
These are just two examples of the expansive Berkshire empire, and they are not representative of the whole business. Nevertheless, in recent years Buffett has been moving into industries such as railroads and utilities, which generally tend to exhibit qualities similar to oligopolies. BNSF has undoubtedly built structural barriers to entry around its operation by becoming one of the largest railroad companies in the United States.
Before Buffett's acquisition, the business was already well-known in the industry for running a highly efficient railroad, which certainly qualifies as building its moat. But the company also operates virtually unopposed in individual states, giving it room to charge whatever it fancies. Then there's Buffett's ownership of Texas utility firm Oncor. Utility companies are known around the world for dubious pricing practices, and it would be naive to believe Oncor is any different.
Difficult to avoid
As mentioned above, these are just a few of the many companies that make up the Berkshire Hathaway empire, and they are not representative of the whole group. However, they do show there is some truth to the statement moats can be unethical, especially in some industries and markets.
But this is not a problem exclusive to Berkshire Hathaway. Rather, it is more of a negative side to the business world. In a truly competitive environment, this would not be the case, but the world is not a perfect place. In some Industries, it is impossible to be entirely competitive.
Disclosure: The author owns no stocks mentioned.
About the author:
Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.
Subscribe
via Email
Subscribe RSS
Hmmm, where is it written that every business has to be completely competitive? As long as a company is complying with the law, it can be argued that the company has an "ethical obligation" to its shareholders, not its competitiors. Ethics work in a variety of ways; is being ethical to one subset [competitors] at the expense of ethics to another subset [shareholders] truly being ethical? By what definition? In fact a company has a legal, fidiciary duty to its shareholders, which trumps any subjective ethical duty. Perhaps Mr. Musk will want to give away his technologies and advancements in the interest of "ethical competitiveness"; if so, clearly a reason to avoid TSLA. The fact that Musk has picked on one of the most ethical corporate CEOs of our time says a lot. And as usual, Buffett has taken the high road.