Friday, May 25, 2018
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Moat is tough to build, tougher to identify

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In recent past, many people were searching for Moats and calling every other company with high ROE as a Moat. Currently, forget moat, people are not even asking ROE or PE ratio.
What is a Moat? Buffett popularized moat. Pat dorsey made more money writing book on Moat and building website on Moat than investing in them (morningstar.com)
Jokes apart
Moat means companies that can survive competition, business cycle and inflation. buffett was paranoid of competition as everything reverses to the mean in capitalism. also he was paranoid of inflation hence he liked companies with pricing power. since his capital base was rising his investment pool was reducing. hence he wanted a solution to park these long term assets (insurance float) permanently. he learnt from a small company “see’s candies” that companies can have pricing power and sticky customers due to brand and r&d. thats it!
Advantage of a moat ? since business cycles, competition do not affect margins a lot, its ok to pay a high looking valuation for the same. you can be reasonably sure of compounding over long years.
Assurance of a moat? very tough. very difficult to build a moat, it requires several yrs of investment in brands and r&d. forget indian trading mentality lala companies doing it.
Does indian companies have a moat? 90% of indian companies have low cost as moat. having a low cost also gives you similar characteristics of a moat. stable margins over competition and business downcycle. eg. hdfc ltd., mahindra (tractor biz only), maruti, etc. TCS has a moat but longevity is an issue due to tech obs.
Even if you see most of the companies owned by mr sanjay bakshi, a popular moat investor in India, most of them have low cost characteristics like ambika cotton, tvs srichakra, ccl products, symphony, accelya kale, relaxo, kitex, etc. most of them are low cost.
Why people assume high ROE as moat? any business is supposed to earn ROE > cost of capital otherwise why start a business. don’t mistake it for moat.
Pay sensible price of not more than 20x earnings (unless its very high growth).
Take away: fuck brands, find low cost operators if searching for moat in India

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