If the market went down 10%+ what would you be buying?

[Ross812]

Intel's strength is in a four year process lead over the competition. Their moat is just as strong as Microsoft's on the enterprise segment because full windows runs only on x86. Now we are seeing declining pc sales because of mobile. The casual user no longer needs a pc. The server market is still growing for them. Windows 8 is Intel's first real foray into tablets and the jury is out on how that will go. I addition to they are two years from having their own flagship cpu's in mobile phones if their current ticktock program progresses at the same rate it has the past seven years.

[ItsAValueTrap]

In technology, the message seems to be "software replaces hardware" and basically specialized hardware providers are going to be replaced by generic boxes where software does the work. For example, a mechanical clock is replaced by an electronic clock - a box with a circuit in it, or a CRT TV replaced with a computer monitor - a box with a computer in it. I could find more examples, but I think the idea is that whenever you need specialized hardware to manipulate information, software will do that job in the future.

There is something called bitcoin mining where hardware is replacing software.  There are many areas where the software is developed first.  And then for performance reasons, people start looking at specialized hardware.  Anything where GPGPUs are used would be an example.

 

Intel's strength is that a lot of software is written for the x86 instruction set, but in the future it is likely more and more software will be independent of the processor platform...

I think that the x86 instruction set is a very weak moat and it matters less nowadays than it used to be.  If you look at Intel versus AMD, the moat doesn't exist since both companies can make x86 chips.  Intel's real moat in my opinion is its lead in manufacturing technology.  In process size it is usually around a year ahead (this varies).  In process technology it is 3-4 years ahead (this varies)... it may only be 2 years ahead in finFET.

 

Intel and Microsoft are probably the two companies out there with the best moats in the tech sector.  If tech companies can have moats.

Mainframe computer companies have sticky customers... it costs their customers a lot to leave them.  I wouldn't call that a moat.

 

2- The best examples of moats to me would be:

-Moody's.  Their reputation is not something that can easily be duplicated.

-Newspapers in single-newspaper cities.  Or, the largest newspaper in a city about to become a single-newspaper city.  Of course, we know how this story played out... Warren had trouble with the latter due to union disputes and now newspapers are getting hurt by the Internet.  But I think he did make out well financially on it.

-Fannie/Freddie.  The implicit gov't guarantee on their debt gives them a low-cost financing advantage that nobody else can duplicate.

 

To me, those companies have an "unfair" competitive advantage that is very hard or impossible to duplicate.  It's just very difficult to compete against them... it's not a level playing field.  Many moats do not last forever, e.g. newspapers versus the Internet.

 

To go from $1m to $1b a moat has to exist.

There are some fields where you cannot have a moat.  Yet because management is so good, they build a $1B company based on their skill.  Contango Oil&Gas is like this.

 

A lot of Warren Buffett businesses don't really have a strong moat but have good managers.  To me Wells Fargo seems to be a bet on management (along with M&T).

 

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.

I'm guessing a Warren Buffett with less money would do that.  Originally he wasn't into buying quality businesses until See's Candies.  The textiles business of Berkshire Hathaway was a little bit of a mistake... he was pissed that management lied to him about the tender offer.

[Guest valueInv]

Keep watching this:

 

http://venturebeat.com/2012/10/30/arm-announces-its-beefy-64-bit-processor-core-for-servers/

[ItsAValueTrap]

Honestly I think that Intel's biggest threats would be:

 

-End of Moore's Law / Moore's Law slowing down to a trickle

-Contract fabs like TSMC developing technology on par with Intel's manufacturing capabilities.  This would make AMD extremely dangerous as AMD can design chips just as well as Intel (and they have done so in the past).

-Desktops/laptops being replaced by something else (e.g. smartphones/tablets); hugely unlikely in my opinion.

 

ARM just isn't that dangerous in the server space.  They are just another RISC instruction set, and the whole RISC versus CISC difference is irrelevant now.  x86 chips from AMD and Intel are taking market share from the RISC-based CPUs in servers.

[biaggio]

I think the concept of a moat is a little overblown, especially by beginning investors. IMHO very few businesses truly have economic moats, and yet many businesses do just fine. Coke is said to have an economic moat, but that doesn't mean Pepsi cannot do well...

 

The following is a summary of what I read on the internet:

In technology, the message seems to be "software replaces hardware" and basically specialized hardware providers are going to be replaced by generic boxes where software does the work. For example, a mechanical clock is replaced by an electronic clock - a box with a circuit in it, or a CRT TV replaced with a computer monitor - a box with a computer in it. I could find more examples, but I think the idea is that whenever you need specialized hardware to manipulate information, software will do that job in the future.

 

Intel's strength is that a lot of software is written for the x86 instruction set, but in the future it is likely more and more software will be independent of the processor platform...

 

How about this, I'll flip it around.  I could argue easily that every business that isn't going out of business has a moat.  There's a reason they are still in business, customer relationships, a key plant location.  A business with absolutely zero moat will be out of business soon as a competitor with the smallest semblance of a competitive advantage will take their customers.

 

I think investors blow competitive advantages out of proportion.  If you read a 10-k there's a section in there for competitive advantages, note how all companies are able to come up with something.  To investors some of these things seem phoney, like "the strength of our customer relationships", or "our customer service" or "our quality".  Seems like something that can be replicated.  I am not a professional investor, I've worked at real companies in the real world, and those things do exist.  I've seen a number of contracts walk from one client to another when a sales person leaves.  There are also tiny companies that seem to have no advantage, yet a sales person or CEO who knows everyone, and people use people they know.

 

Here's an interesting thought experiment, or a real one if you're so inclined.  Call up some of these moat companies and ask the CEO what makes their company better than competitors.  The answer they give might be much different than what an investor might give.  Does the CEO, the person with the most visibility know the future of their company?  Does the CEO know how to value it?

 

I've been thinking about this some recently.  Essentially a Buffett moat company is a leading company in industry.  You have the Coke and Pepsi companies, Exxon etc.  The truth is there is no secret sauce to their current success, they have one thing, inerta.  When a company is so big is just continues to roll forward.  Do you think that Exxon really has hired the 90,000 best and brightest?  All companies supposedly hire the best and brightest, at some point the next person hired isn't quite as bright and so on and so forth.

 

As for moats, I think the true ones are found in smaller growing companies.  I listened to an interview with the author of a book, Blueprint to a Billion recently.  He talked about companies that grew from $1m in revenue to $1b in revenue in 10-15 years.  These are the Starbucks, the McDonalds going from infancy stage to the industry leader.  To go from $1m to $1b a moat has to exist.

 

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.  Instead why not look at these tiny companies in a startup stage, if a moat exists you could make 100 or 200x your money rather than 15% a year.

 

Another question to anyone who's an expert on a business model and can somehow see into the future.  Why use that in investing, why not start a consulting business, or start a business to exploit it?

 

Good post.

 

Its hard to find those small companies that are cheap with significant enduring competitive advantage,but it may be even harder to compete against large players stockpicking big companies.

 

Oddball, how do you troll for these oddball stocks i.e where do you scan or look? Do you use screens?

 

I look at new lows, scan earnings- I generally don t have a bias against small or micro caps. You make a lot of sense.

[Palantir]

 

How about this, I'll flip it around.  I could argue easily that every business that isn't going out of business has a moat.  There's a reason they are still in business, customer relationships, a key plant location.  A business with absolutely zero moat will be out of business soon as a competitor with the smallest semblance of a competitive advantage will take their customers.

 

I disagree. I think a "moat" is something that is personell-independent. That means, you can replace the key employees in a firm, and it is still likely to do well. KO springs to mind, AAPL does not really. This also rules out many other firms. Many businesses are kept in place due to relationships, as you noted, I don't consider them to have true "moats". What happens when that relationship frays?

 

I think investors blow competitive advantages out of proportion.  If you read a 10-k there's a section in there for competitive advantages, note how all companies are able to come up with something.  To investors some of these things seem phoney, like "the strength of our customer relationships", or "our customer service" or "our quality".  Seems like something that can be replicated.  I am not a professional investor, I've worked at real companies in the real world, and those things do exist.  I've seen a number of contracts walk from one client to another when a sales person leaves.  There are also tiny companies that seem to have no advantage, yet a sales person or CEO who knows everyone, and people use people they know.

 

I agree that investors blow it out of proportion, as I noted earlier. However, my opinion is that companies with moats are just really rare and rarely ever undervalued, and getting too fixated on the competitive advantage can eliminate many good investments.

 

 

I've been thinking about this some recently.  Essentially a Buffett moat company is a leading company in industry.  You have the Coke and Pepsi companies, Exxon etc.  The truth is there is no secret sauce to their current success, they have one thing, inerta.  When a company is so big is just continues to roll forward.  Do you think that Exxon really has hired the 90,000 best and brightest?  All companies supposedly hire the best and brightest, at some point the next person hired isn't quite as bright and so on and so forth.

 

As for moats, I think the true ones are found in smaller growing companies.  I listened to an interview with the author of a book, Blueprint to a Billion recently.  He talked about companies that grew from $1m in revenue to $1b in revenue in 10-15 years.  These are the Starbucks, the McDonalds going from infancy stage to the industry leader.  To go from $1m to $1b a moat has to exist.

 

I consider inertia to be a substantial moat, especially in a business where there is not substantial change. Companies with strong distribution chains can really crush competition using their size.

 

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.  Instead why not look at these tiny companies in a startup stage, if a moat exists you could make 100 or 200x your money rather than 15% a year.

 

I am long Neustar (NSR) for that reason....let's see how it goes...

[alwaysinvert]

Moats are a continuum and not a binary sort of thing. Buffett speaks of companies with BIG moats with crocodiles, that is there are also smaller ones. Putting huge emphasis on moats and moats only is a beginners' disease to me (not saying I'm a non-beginner myself). Some people start with the moat and work on valuation from there. These days I start with low price and worry about the rest only after that is established. That has mostly lead me towards micro caps, but most recently I have been buying Dell.

 

Looking for moats in particular would on the other hand skew me towards larger caps right from the outset, an area in which I'm not overly comfortable and where I suspect the possible edge is generally smaller. I figure that being an expert on Amazon may prove beneficial but I'll worry about that stock when it's at 9 times earnings instead...

[oddballstocks]

 

Good post.

 

Its hard to find those small companies that are cheap with significant enduring competitive advantage,but it may be even harder to compete against large players stockpicking big companies.

 

Oddball, how do you troll for these oddball stocks i.e where do you scan or look? Do you use screens?

 

I look at new lows, scan earnings- I generally don t have a bias against small or micro caps. You make a lot of sense.

 

I usually don't run screens, if I do they're very broad, like P/E < 6, P/B < 1.  I've gone through lists of stocks from A-Z in the past.  I get ideas emailed to me, some are good, some are terrible.  I also bump into a lot of stocks.  I'd say bumping into things is where I find the most ideas.  So for example, someone might email me some idea, I'm looking at them, I look on Yahoo for competitors, and then find a link in a competitor message board saying "xyz stock is similar but cheaper" and down this rabbit trail I go eventually finding something interesting.

 

[meiroy]

 

 

I have been thinking about this question since it was posted, I think what I would do is just before the market starts to decline I'd sell calls and then use the money to buy puts. x_O

 

[twacowfca]

 

 

I have been thinking about this question since it was posted, I think what I would do is just before the market starts to decline I'd sell calls and then use the money to buy puts. x_O

 

 

Exactly. To invert: sell high, and then buy low.  :)

[Palantir]

If the market went down substantially, I'm going to initiate a long on BRK.B. It's getting very close to the "buy" price of 1.1*BV. And a marketwide 2-3% decline could put me and WEB on the same side of the trade. (Great minds think alike :)))

[jeffmori7]

Palantir, the book value is not static, hence it has probably lowered a bit also as he equities portfolio is probably down like the market. So it is not certain that the book value based on Q3 report is valid now, Berkshire has probably to drop more than the market for this. Anyway, don't trouble yourself trying to track the live book value as I am somewhat implying!

[Palantir]

Time to bump this thread. If market plummets over the next month, what are you guys hoping comes on sale?

 

I'd like to add to my position in Red Hat, PH, MSFT, and maybe a couple of large caps like Oracle.

[valuecfa]

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.  Instead why not look at these tiny companies in a startup stage, if a moat exists you could make 100 or 200x your money rather than 15% a year.

 

When you find one, shoot me a PM

[fareastwarriors]

10% is not enough to cause me to do anything.

[Guest deepValue]

So the question to everyone who's looking for moats is this.  If you can get good at identifying a durable competitive advantage why are you investing in $10b companies that have limited growth.  Instead why not look at these tiny companies in a startup stage, if a moat exists you could make 100 or 200x your money rather than 15% a year.

 

Moats generally aren't present in tiny companies with high growth prospects. Besides, it's pretty much impossible to judge the durability of a moat if the company has only been around for a few years. There are tiny companies that have moats, but they generally aren't growing any faster than the really big companies with moats. The difference is that fewer people bother looking at the tiny companies, so there is a higher prevalence of bargains in the nano-cap space.

 

I think one of the reasons "moat" investors get such a bad rap is that people keep shouting about how Apple and Google have these enormous moats, when in fact their moats are quite fragile. If you can't tell what a business will be selling and at what margin five or ten years down the road, then the company surely does not have a moat. If it isn't earning above-average returns on invested capital, it almost definitely does not have a moat. If new technology will disrupt an historically high-ROIC business, no matter how long that business has been earning outsized returns, it does not have a moat. If you want to invest in "moated" companies, you have to be a lot more selective than if you're buying a net-net.

 

It shouldn't be too difficult to determine whether a company has a moat -- though it may take extensive research to become confident in that appraisal. The difficult part is only selecting the best opportunities and pouring a substantial portion of your net worth into the investment. I think this is why few investors want to invest exclusively in wide-moat companies -- they like to buy too many stocks and they aren't comfortable with concentration.

 

There is very little separation of analytical skills between investors once you get to a certain level -- the difference between a great investor and a mediocre investor is philosophy and temperament.

[Palantir]

Also another reason is that in many cases, a moat is only developed once an organization has sufficient critical mass, network effects, and economies of scale, something that only comes with size. In their early years, many of these "moat" firms may well have a "commoditized" business but are led by a brilliant founder who's able to construct an long lasting institution. After the achievement, we can say the firm has a moat, but it is not readily detectable early on.