The Oracle of Omaha is stepping down as the chief of Berkshire Hathaway by end of this year.
All of us have learnt so much from him.
A key learning that stands out in my mind is
๐ต๐ผ๐ ๐๐ผ ๐ถ๐ฑ๐ฒ๐ป๐๐ถ๐ณ๐ ๐ฎ ๐๐ฟ๐๐น๐ ๐ด๐ฟ๐ฒ๐ฎ๐ ๐ฏ๐๐๐ถ๐ป๐ฒ๐๐
In one of this shareholder letters, Buffett
says that โ๐ผ ๐ฉ๐ง๐ช๐ก๐ฎ ๐๐ง๐๐๐ฉ ๐๐ช๐จ๐๐ฃ๐๐จ๐จ ๐ข๐ช๐จ๐ฉ ๐๐๐ซ๐ ๐๐ฃ ๐๐ฃ๐๐ช๐ง๐๐ฃ๐ โ๐ข๐ค๐๐ฉโ ๐ฉ๐๐๐ฉ ๐ฅ๐ง๐ค๐ฉ๐๐๐ฉ๐จ ๐๐ญ๐๐๐ก๐ก๐๐ฃ๐ฉ ๐ง๐๐ฉ๐ช๐ง๐ฃ๐จ ๐ค๐ฃ ๐๐ฃ๐ซ๐๐จ๐ฉ๐๐ ๐๐๐ฅ๐๐ฉ๐๐ก. The dynamics of capitalism guarantee that competitors will repeatedly assault any business castle that is earning high returns”
๐ฆ๐ผ ๐ต๐ผ๐ ๐ฑ๐ผ ๐๐ผ๐ ๐ฎ๐๐๐ฒ๐๐ โ๐บ๐ผ๐ฎ๐โ?
There is no one formula to measure business moats. The all encompassing metric that comes closest is ROIC (or ROE for financial services) — a business which is able to demonstrate high ROIC for a significant period is able to do so because it has moat.
The following characteristics provide formidable barriers against competition โ in other words these are ๐ธ๐ฒ๐ ๐๐ผ๐๐ฟ๐ฐ๐ฒ๐ ๐ผ๐ณ ๐บ๐ผ๐ฎ๐:
– [ ] ๐๐ผ๐๐ ๐๐ฑ๐๐ฎ๐ป๐๐ฎ๐ด๐ฒ
e.g., Costco (US retailer) procures (and sells) at the lowest cost
Netflix incurs negligible incremental cost in onboarding a new subsriber
– [ ] ๐๐ฟ๐ฎ๐ป๐ฑ ๐ฃ๐ผ๐๐ฒ๐ฟ
e.g., Apple is able to charge a premium because of its brand value, which is synonymous with innovation and quality
– [ ] ๐๐ถ๐๐๐ฟ๐ถ๐ฏ๐๐๐ถ๐ผ๐ป
e.g., Large FMCG and beverage companies have presence in the remotest of areas
– [ ] ๐ก๐ฒ๐๐๐ผ๐ฟ๐ธ ๐๐ณ๐ณ๐ฒ๐ฐ๐๐
e.g., Hospitals are encouraged to tie up with Health Insurers that have a lot of customers. In turn, customers are encouraged to go for health insurers that provide coverage across multiple hospitals. This creates networking effects for the health insurer
Moreover, digital platforms like Meta, LinkedIn, Uber have a lot of networking effects as well
– [ ] ๐ฆ๐๐ถ๐๐ฐ๐ต๐ถ๐ป๐ด ๐๐ผ๐๐๐
e.g., Switching from one IT service provider to another is a lot of cost and effort for a company. This creates a switching cost moat for the IT provider
– [ ] ๐ฃ๐ฟ๐ผ๐ฑ๐๐ฐ๐ ๐๐ถ๐ณ๐ณ๐ฒ๐ฟ๐ฒ๐ป๐๐ถ๐ฎ๐๐ถ๐ผ๐ป
Can you think of companies offering differentiated products or services?
What are some of the other sources of moat?
Analyzing these sources are key to the research and investment thesis of any business.
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Invest (in yourself) and Rise!
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