Thursday, January 23, 2020

The Direction of Moats

It's easy for a value guy like me to see some technology companies—or those that claim to be technology companies—that are losing a bunch of money and valued at billions or tens of billions of dollars and call it all a bubble. 

And in many cases, with specific companies, I think it's true. 

But in many other cases, the effects of the internet, the "software is eating the world" dynamic, and the tendency of "winner-take-all" to be amplified because of those characteristics means that, for the companies that succeed, the large majority of their value, and maybe more than all of their profits, will be realized many years from now. 

I've been thinking about all of this as I was reviewing my Final Decision Checklist and read the quote from Rob Vinall that I included on it: 
“In my view, widening the moat is more important than the width of the moat. Everyone is attacking a company’s moat, so the question is not how wide it is, but whether it is widening at a faster pace than competitors are filling it up. Innovation is central to the idea of widening a moat.”
Price matters. A lot. Almost everything is a good value at one price and a bad value at another. There are plenty of examples—such as Microsoft from 2000-2015—where business performance can be good to great to fantastic and yet, if you bought at too high of a price, you earn no positive return. 

Expectations can be too high for even the best of companies.  And competition that one couldn't see, or that may not have even existed, can enter the arena and cause the future of a given business to be worse than most may have imagined. 

So as one who still admits to being a value investor and puts most emphasis on the present and near-term future when making the decision to invest in something—as opposed to the far off future—I may miss investing in some great companies if the expectations are already fairly lofty. 

But because, according to people like Kevin Kelly or Jeff Bezos, we are likely still in the early days of the internet's effect on business and society, I think it's important to study the companies that have the potential to be some of the most important companies of the future—some of which are profitable today, and some which are not. 

And when I'm trying to decide which companies to watch and which to ignore for the time being, the main thing I think about is whether or not the industry will be more or less competitive in the future, and thus, whether or not a given company's competitive position is likely to be better or worse a decade from now. Or, in other words, what is the likely direction of the moat?