Be Careful of Moats

Moat is a concept that was brought into the forefront of investment discussions by Buffett. He made it famous by describing it as, "But all the time, if you've got a wonderful castle, there are people out there who are going to try and attack it and take it away from you. And I want a castle that I can understand, but I want a castle with a moat around it."

A business with a moat would imply one which has higher earnings power, higher margins and higher returns on capital than one without. A good way to think about moats is by asking yourself, if prices can be increased without loss of customers or can competitors reduce price and take away the customers of the company?

Some sources of sustainable competitive advantage can come from the following:

-     Better products – Google, Apple etc

-     Intellectual capital (Patents / Copyright) – Big Pharma, Disney

-     Lower cost structure – Shree Cement, Tata Steel

-     Captive customers (high switching costs for customers) – Banks, Corporate ERP systems (e.g. SAP)

-     High entry barriers to business (huge capital, license, hazard, geographical dominance etc) – ONGC, Maruti, Microsoft Windows

-     Economies of scale – Incremental cost of production reduces – Android

-     Distribution (ability to reach more customers) – Hindustan Unilever, Amazon etc

-     Better known brands, which help customers reduce search efforts – Nescafe, Levi’s, Pidilite (Fevicol) etc

Just having a well-recognized brand does not comprise a moat. The brand needs to be able to translate into better higher earnings power. For example, in consumer electronics, Sony is a globally well-recognized brand. But will anyone pay a significantly higher price for a Sony TV today? A good brand is one which is able to reduce search costs for alternatives for a consumer. It becomes an automatic choice. And that can become a very powerful tool for a company.

Moat comprises of two components - sustainable competitive advantage and competitive advantage period. Most of the time, investors focus on only the first. In real life, the second (the duration of time when the competitive advantage period plays out) is equally or sometimes, more important. As we have seen over history, very few companies are able to sustain for very long. We only have a handful of companies which used to operate a hundred years back. In the US, which has a much longer documented history of capital markets, General Electric is the only company which remained a constituent for over a hundred years. If we look at the Sensex when it was first constituted, the list of companies was as follows:

Asian Cables, Ballarpur Industries, Bombay Burmah, Ceat Ltd, Century Textiles, Crompton Greaves, Glaxo Smithkline, Grasim, GSFC, Hindalco, Hindustan Motors, HLL, Indian Hotels, Indian Organics, Indian Rayon, ITC, Kirloskar Cummins, L&T, M&M, Mukand, Nestle, Reliance Industries, Scindia Shipping, Siemens, Tata Motors, Tata Power, Tata Steel, Zenith.

A large number of these companies either have ceased to exist or are a pale shadow of their former selves. This just goes to prove that a competitive advantage does not last indefinitely. A company needs to continuously work at widening its moat. As an investor, even if we identify a company with an apparent moat, we need to continuously keep an eye out for the changes to its competitive position.

This article first appeared in The Economic Times - https://economictimes.indiatimes.com/markets/stocks/news/even-moat-does-not-last-long-buy-if-you-find-it-but-stay-alert-of-changes/articleshow/68595743.cms

Weekend Reading - Some Interesting Stuff

Just like low-cost airlines charge us for every additional feature, apparently, Boeing does the same to them! There were 2 critical safety features that Boeing sells as optional, which could have prevented the recent catastrophic crashes. Standard 737 Max planes are not equipped with a so-called angle of attack indicator or an angle of attack disagree light. 

https://www.nytimes.com/2019/03/21/business/boeing-safety-features-charge.html

Amazon is planning to launch close to 2000 brick-and-mortar retail supermarkets in the US. It will be Amazon’s sixth physical retail format after Whole Foods, Amazon Books, Amazon Go, Amazon 4-Star and Amazon Pop-Up. Though Amazon is a behemoth in online retail, it's market share in overall retail in the US is small (between 5%-8% based on estimates). Now, it may be gearing up to challenge that position.

http://knowledge.wharton.upenn.edu/article/amazon-grocery-store/

While on the topic of Amazon, here is a detailed look at how Amazon progressively improved its online retail business to get where it is today.

https://zackkanter.com/2019/03/13/what-is-amazon/

I have found that being able to do the basic things well lead to excellent results. Now there is research which proves me right.

https://sloanreview.mit.edu/article/the-surprising-value-of-obvious-insights/

We are now very close to having the technology to bring back extinct animals. Here is an article on why it does not make sense to do so (other than of course the horrors of a Jurassic Park kind of tragedy!!)

https://qz.com/1566083/we-shouldnt-bring-back-extinct-animals-like-the-woolly-mammoth/

Weekly Reading - Some Interesting Stuff

A wonderful article on Stéphane Breitwieser, who robbed nearly 200 museums, amassed a collection of treasures worth more than $1.4 billion.

When it comes to stealing from museums, Stéphane Breitwieser is virtually peerless. He is one of the most prolific and successful art thieves who has ever lived. Done right, his technique—daytime, no violence, performed like a magic trick, sometimes with guards in the room—never involves a dash to a getaway car. 

https://www.gq.com/story/secrets-of-the-worlds-greatest-art-thief

A detailed look at how the shared economy is shaping the traditional business model and how the hotel business is adapting and changing to the new situation.

http://knowledge.wharton.upenn.edu/article/short-term-rentals-the-transformation-in-real-estate-and-travel-set-to-check-in/

Delivery robots can, over time, also become "goods-shifting" robots.

If the arrival of automated delivery robots could lower the effort to sell or return goods to the minimal amount it now takes to buy them, users might exchange products through a new kind of logistical network that would make the process of acquiring and trading physical objects as frictionless as that of downloading and deleting digital files. Users might trade products among themselves through new kinds of logistical networks — a kind of peer-to-peer sharing for physical objects.

https://reallifemag.com/free-shipping/

Algorithms can now make your psychological profile from your social media interactions! That has major commercial ramifications like advertising targeted to your specific moods. This, and other kinds of profiling, are not limited to only social media.

There are systems today which automate a job interview: job seekers speak with a computer by telephone, which then creates a detailed psychogram based on their responses.  Software that analyzes faces for clues to mood, personality or other psychological features is being explored as well. 

www.scientificamerican.com/article/the-internet-knows-you-better-than-your-spouse-does/

A fascinating glimpse into the thought process of Vaclav Smil.

Confusing models with reality is a cardinal sin of clear thinking. If you believe too strongly in your models of the world, you can start to ignore evidence that your model is wrong.

https://thepolymathproject.com/a-few-principles-for-thinking-clearly/

Improving Investing Acumen

My presentation in today's VP Kolkata meet

Attributes of a Great Investor by abhishekbasumallick on Scribd

For those having difficulty accessing the above link, please try this:

Attributes of a great investor from AbhishekBasumallick1

Weekly Reading - Some Interesting Stuff

This is an article on how independent hotels may be better off than their branded brethren in the hotel industry. They can offer a better customer experience by being niche and exclusive.

http://www.businessworld.in/article/Independent-Hotels-How-they-are-Managing-to-Stay-Ahead-of-the-Game-/20-02-2019-167416/

Bill Gates is one of the most intelligent and prescient people alive. His annual letters are a treat to read. They remain optimistic about the future of the world. This year they have picked nine areas which have surprised them. Overall, a very nice read.

https://www.gatesnotes.com/2019-Annual-Letter

Bata India has been the ubiquitous show brand that nearly all of us grew up with. Now they are reinventing themselves.

https://www.fortuneindia.com/enterprise/bata-india-striving-for-the-right-fit/103002

India and Bangladesh are a study in contrast, though not directly comparable. Bangladesh follows a labour-intensive manufacturing model for development. India, on the other hand, is progressing as a services-oriented economy. But there is a twist in the tale.

The developing world is at risk of premature deindustrialization. If Bangladesh fails due to competition from rich-world robots, it will bode ill for countries such as Ethiopia that are looking to hop on the escalator to prosperity. That would leave India’s service-centric development model as the only feasible path.

https://www.bloomberg.com/opinion/articles/2019-02-24/bangladesh-and-india-pursue-different-economic-models-for-growth

We need to wake up to the alarming situation that we are pushing ourselves into. Air pollution, water scarcity need to be attacked with major policy initiatives and also at personal levels for all of us.

https://qz.com/india/1559574/water-shortages-may-compound-delhis-air-pollution-woes/

Weekend Reading - Some Interesting Stuff

This article is a compilation of 10 mega trends for India in 2030.

By 2030, it is on course to witness a 4x growth in consumer spend. It will remain one of the youngest nations on the planet and will be home to more than one billion internet users. The new Indian consumer will be richer and more willing to spend, and unlike her predecessors, she will have very specific preferences.

https://www.weforum.org/agenda/2019/01/10-mega-trends-for-india-in-2030-the-future-of-consumption-in-one-of-the-fastest-growing-consumer-markets/

Herb Wertheim may be the greatest individual investor the world has never heard of. He has accumulated over $2.3billion by buy-and-hold investing.

“My thing is,” Wertheim says as he reflects on his long career, “I wanted to be able to have free time. To me, having time is the most precious thing.”

https://www.forbes.com/sites/maddieberg/2019/02/19/the-greatest-investor-youve-never-heard-of-an-optometrist-who-beat-the-odds-to-become-a-billionaire

A fascinating tale of putting chips inside our bodies. These chips then become our credit cards, electronic keys and possibly health monitors. This is not a sci-fi article, it is what is happening today in real life.

http://fortune.com/longform/biochipping-biohax-microchip/

I have always followed the careers and lives of people. Chandra Kochhar's life is an instructive one, the ride up from nameless corporate employee to a celebrated woman-leader and the flag-bearer of ICICI Bank, to the fall from grace. Here is a recent timeline of the events.

https://www.businesstoday.in/top-story/chanda-kochhars-fall-from-grace-here-is-how-she-was-caught-step-by-step/story/321344.html

Food delivery apps have changed the way we eat. Here are two articles which give you two different perspectives on that space.

Uber is looking to sell its two-year-old UberEats business in India to cut down losses and Oyo Rooms is reportedly planning to buy FreshMenu to get into food delivery space!!

https://www.businesstoday.in/current/corporate/ubereats-on-sale-swiggy-zomato-competing-acquire-food-delivery-app-report/story/321164.html

https://www.businesstoday.in/current/corporate/oyo-rooms-freshmenu-oyo-freshmenu-deal-oyo-to-foray-into-food-delivery-space-in-talks-to-acquire-freshmenu-for-30-million/story/321191.html

Weekly Reading: Some Interesting Stuff

A super interesting experiment of living modern life without Amazon, Google, Facebook, Microsoft and Apple. An eye opening account of how big tech has taken over our lives.

https://gizmodo.com/i-cut-the-big-five-tech-giants-from-my-life-it-was-hel-1831304194

An article on how to live a life of intellectual freedom and not be chained by borrowed ideas.

Confusing models with reality is a cardinal sin of clear thinking. If you believe too strongly in your models of the world, you can start to ignore evidence that your model is wrong.

https://medium.com/the-polymath-project/a-few-principles-for-thinking-clearly-d18a74a2ebe9

I have a theory about why the notion of an arms race between human and machine intelligences is fundamentally ill-posed: the way to survive and thrive in an environment of AIs and robots is not to be smarter than them, but to be more mediocre than them. Mediocrity, understood this way, is an independent meta-trait, not a qualifier you put on some other trait, like intelligence.

In other words, evolution is survival, not of the most mediocre (that would lead to paradox), but survival of the mediocre mediocre.

https://www.ribbonfarm.com/2018/04/24/survival-of-the-mediocre-mediocre/

A long read on the platform economy and how network effects work and sometimes fail.

https://hbr.org/2019/01/why-some-platforms-thrive-and-others-dont

A compilation of learnings from the markets in the last 30 years from Jon Boorman of Broadsword Capital

https://www.broadswordcapital.com/things-ive-learned-last-30-years/