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Wide Moats


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I find much of the discussion of "moats" in investing to be overly simplistic. Here are three examples of companies with wide moats (aka significant competitive advantages) that have performed poorly over the past few years.

 

1) National Oilwell Varco

Leading supplier of equipment and components for offshore hydrocarbon exploration and production. Moaty enough that people in the industry sometimes joked that the acronym "NOV" stood for "no other vendor." The rise of shale drilling + lower oil prices devastated demand for new offshore rigs, crushing what was by far NOV's most lucrative segment. Many people probably recall The Motley Fool being super bullish on these guys right near the top of the cycle.

 

2) Gamestop

By far the leading player in the buy-trade-buy used console video game ecosystem. Crushed by the market shifting from discs to digital.

 

3) Stericycle

Unsurpassed scale in disposing of hazardous waste ruined by poor capital allocation (I'm not as familiar with this one, so someone correct me if this is incorrect).

 

I would argue that all three of these companies retain their moats.

 

Three conclusions -- and I recognize that these probably aren't ground-breaking:

1) Cycles matter

2) Secular growth / decline matters

3) Capital allocation matters

 

 

One question: Can anyone think of a wide moat company that was severely damaged by regulation?

 

 

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Regarding your observations: yes.  8)

 

Regarding your question: IBM? Old Ma Bell? MSFT? DVA?? with some interpretation of "regulation" - Fannie/Freddie? Asbestos? Do you include deregulation too? ;)

There are probably additional examples of moaty companies hit by safety regulation, compensation/labor regulations, gambling/alcohol/etc prohibition(s)/restrictions (although Big Tobacco presumably did not suffer much).

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Regarding your observations: yes.  8)

 

Regarding your question: IBM? Old Ma Bell? MSFT? DVA?? with some interpretation of "regulation" - Fannie/Freddie? Asbestos? Do you include deregulation too? ;)

There are probably additional examples of moaty companies hit by safety regulation, compensation/labor regulations, gambling/alcohol/etc prohibition(s)/restrictions (although Big Tobacco presumably did not suffer much).

 

My impression is that wide moat companies like MSFT, as well as Big Tobacco have actually done very well after being subject to intense regulatory scrutiny. Ditto for the Ma Bell breakup. I was wondering if anyone could think of any counterexamples....

 

Also, it has come to my attention that I neglected to finish giving this thread a title. Oops.

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Regarding your observations: yes.  8)

 

Regarding your question: IBM? Old Ma Bell? MSFT? DVA?? with some interpretation of "regulation" - Fannie/Freddie? Asbestos? Do you include deregulation too? ;)

There are probably additional examples of moaty companies hit by safety regulation, compensation/labor regulations, gambling/alcohol/etc prohibition(s)/restrictions (although Big Tobacco presumably did not suffer much).

 

My impression is that wide moat companies like MSFT, as well as Big Tobacco have actually done very well after being subject to intense regulatory scrutiny. Ditto for the Ma Bell breakup. I was wondering if anyone could think of any counterexamples....

 

Also, it has come to my attention that I neglected to finish giving this thread a title. Oops.

 

I think this is exactly why FB is embracing and basically begging for govt regulation. It's easier to drive when you know the road ahead.

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Regarding your observations: yes.  8)

 

Regarding your question: IBM? Old Ma Bell? MSFT? DVA?? with some interpretation of "regulation" - Fannie/Freddie? Asbestos? Do you include deregulation too? ;)

There are probably additional examples of moaty companies hit by safety regulation, compensation/labor regulations, gambling/alcohol/etc prohibition(s)/restrictions (although Big Tobacco presumably did not suffer much).

 

My impression is that wide moat companies like MSFT, as well as Big Tobacco have actually done very well after being subject to intense regulatory scrutiny. Ditto for the Ma Bell breakup. I was wondering if anyone could think of any counterexamples....

 

I disagree about MSFT. MSFT has done well post-Ballmer, but during/post lawsuit they did not do well and clearly were hamstrung in competing/monopolizing/growing/etc. Of course, like most things in real-world, we cannot compare what-if scenarios: would MSFT owned mobile? would it have killed Apple instead of saving it? Would it have bought or killed Google? And so on.

 

How about the complete ban of Google/Facebook/etc in China?

There were a lot of arguments how Qualcomm was hamstrung by GSM cabal - not sure if you'd count this as regulation, since this was both politics and competitors...

 

Ah, how about Huawei? :P

 

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1. You may be wrong those stocks have the moats you think they do.

2. Even if you are right, Philip Fisher in Common Stocks and uncommon profits says very clearly that a wide moat stock that is re-rated at a lower p/e because of the 'financial communicty' means you can double earnings and still have the same stock price in 4-5 years if the community thinks earnings wont' grow as much further on.

 

He states that the longer a growth can be expected the more you can pay. But, it is very hard to determine long term growth rates.

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One question: Can anyone think of a wide moat company that was severely damaged by regulation?

 

Refineries!  They are required to purchase renewable fuel credits because it's cheaper than rebuilding their refineries to meet the requirements.  Wall Street banks purchase the credits, jack up the price and sell them to refiners who have to purchase them and there is a limited supply.  One refiner I owned was paying $100 million a year for these credits.  It was a $5 billion market cap company.  If the government had rescinded that requirement then, at a 10x mulitple, it would add another billion (+20%) overnight to the value of the company with the stroke of a bureaucrat's pen. 

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I have a Fannie and Freddie bias due to my concentration in those names, but I think their moats are some of the safest around. This is why the wind-down crew has never made any inroads: FnF do what they do very well and competing with them (or replacing them) is somewhere between extremely difficult and impossible.

 

Those moats were tested by PLS issuers with catastrophic effects, including to those FnF shareholders who held their shares through 2007 and 2008. The conservatorships are certainly an example of regulation crushing the shareholders.

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Netflix would've gone the way GameStop if they didn't stop dvd rental and move to streaming. I guess this is one of those things, if you ask a person who's familiar on what some of future technology can do, they'll be able to see this scenario coming few years ahead of everyone else.

 

What Buffet called 'Wide Moat' companies are now being attack from all directions, you could say the next gen is filling those moats with cements and slowly being eroded.

 

To answer your question:

One question: Can anyone think of a wide moat company that was severely damaged by regulation?

 

Airlines would be one.. with the deregulation in the 80s.

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I have a Fannie and Freddie bias due to my concentration in those names, but I think their moats are some of the safest around. This is why the wind-down crew has never made any inroads: FnF do what they do very well and competing with them (or replacing them) is somewhere between extremely difficult and impossible.

 

Those moats were tested by PLS issuers with catastrophic effects, including to those FnF shareholders who held their shares through 2007 and 2008. The conservatorships are certainly an example of regulation crushing the shareholders.

I wonder about the endurance of the moat when it is based on chronic political cooperation and proximity.

From a historical perspective, public promotion of home ownership has often been a side effect of policy and has become an explicit objective only relatively recently and IMO the record has been poor. Where's the moat?

From an outsider perspective, I've always been dismayed by the extent of government involvement in home ownership (deductibility of interest and implicit guarantess for what appear to be inconsequential gains).

 

Labels are not necessarily useful and this is coming from a libertarian source but it seems to make a lot of sense.

https://object.cato.org/pubs/pas/PA696.pdf

 

 

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Guest cherzeca

GSEs earn guarantee fees for guaranteeing MBS for approximately half of US home mortgages.  that is not a moat?

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A moat is a set of attributes that make competition particularly difficult. No one, least of all Buffett, has called a moat impenetrable.

 

If you don’t understand why your local utility has a strong moat against new entrants, why GEICO has been gaining market share since 1936, or why Frito Lay is awful hard to challenge in snack food, you ought to think hard about it.

 

I believe there is also a category of businesses that have moats around poor businesses. Hard to compete with, but you wouldn’t want to anyways.

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GSEs earn guarantee fees for guaranteeing MBS for approximately half of US home mortgages.  that is not a moat?

There is a very significant potential moat but there are two masters.

I followed intensely the US real estate market from dot-com to GFC, now no longer get excited in that space and feel that lessons were not learned but maybe I'm the one who needs to learn and will continue to read diagonally the GSE thread.

Mr. Buffett concluded there was a significant moat in 1988 when he built a position in Freddie Mac and has shown, many times, that the government can be your friend. But he sold out in 2000 because of the two-master dilemma.

Have you read Mr. Pat Dorsey's The Little Book... about categories of moats?

What is difficult to grasp is to determine if, under present circumstances, GSE implicit guarantee is a good product.

The moat is based on some kind of licensing concept and I cannot figure out if the set-up is for customer delight or customer captivity.

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