Moats

Moats.

Moat Investment, Value Investment and Speculation.

 

My today’s blog is rather controversial and might spur a debate. I have been reading and hearing a lot about MOAT Investing, special seminars and research papers written on it, stalwarts, professors and Ace investors talking about it as if that is THE thing to do. Buy Right and sit tight forever.

No offence but the topic has been draged too far in my opinion and overstated and overrated.

What is moat investing and how do you calculate it. For the uninitiated, litteral meaning of a Moat is a ditch around a fort or a castle which kings use to build to fend off the enemies. The moat would then be filled with water, crocodiles, barb wires or whatever to keep the enemy at bay.

In Invsting parlance, Warren Buffet used this word to explain companies who’s competetive durable advantage is rock solid and well protected. Warren is always on a look out for companies which poccess such qualities where opposition doesn’t want to compete on their turf even if they have the required capital.

 

What is my point.

 

My point is 02 fold, first is that all that porter analyses, reports and research papers on edge calculation, demographic benefits is highly overrated and is marred by biases suffered by the person who is conducting that research. This is what I call paralyzing by analyzing. No two analysts will be doing the same analyses and therefore will reach different conclusions. Successful investors will do the correct analyses, average Joe will do his own moat analyses and his results will be average too.

So Moat investing is not quantifiable and results are based on psychological and cognitive biases of the individual investor. To presume that you can teach someone to overcome these biases is nothing short of foolhardy. So while you may have an edge in picking moats, you cannot really teach it.

 

I have a simpler and more practical way of a solution. You can simply run a screen on www.screener.in with basic inputs like

Average return on equity 10Years >30 AND

Average return on capital employed 5Years >20 AND

Debt to equity <0.3

 

6 out 10 companies that come out of this simple screener would be your moat investments which would have compounded the shareholders money in the last decade at a very fast clip. From here on, if you simply rule out any fraud and management integrity issues and start accumulating them at every dip (on weekly and monthly charts), you are on your way.

Here are some of the names that show up on this screen result.

Asian paints,Vst Industries, dabur, Glaxo, ITC, TCS, TTK prestige, castrol, hawkings, P&G, Mayur uniquoters, Dhanuka, Bayer crop, colpal etc.

Second Point.

 

Please keep in mind that Moat investment makes sense when you have some other source of income. Warren Buffet did not give 2 hoots to moats when he was NOT a billionaire.

He was doing your typical 01-03 years value investing, revert to the mean plays. Buying 1 dollar bills for 40-50 cents. Buying below intrinsic value and selling them at or just below IV.

It was only later when he had a happy problem of disposing truck loads of cash generated by insurance underwriting profits that he started searching for companies where he could keep putting money (and every incremental addition results in better ROI) without ever worrying of taking it out. Even that needed some convincing from Charlie Munger.

Warren is not alone in this. All these gurus who are are talking about Moat investing are doing it after reaching a certain level. A level where they are no longer working for money, a level where they are basically looking for parking the money without ever thinking of taking it out.

Same holds true for value Investing by the way. It is at second level of hierarchy. You need some base to sustain yourself with 30% per annum (which is Awesome achievement) returns.

With his own admission, Rakesh Jhunjhunwala needed capital desperately to practice value investing full time and therefore took some calculated (or not, depends if you believe in LUCK) bets in trading derivatives.

So, its not as simple as it sounds. For a lay investor, sure Moat investing or in other words, long term trend following. (Its the same, trust me, its just that people get a ego boost and intellectual stimulation by calling it ‘MOAT’.) would work beautifully. But if you are in the markets for a living, you need to start with speculation(or raise capital from friends, family, clients or teach or do an advisory service), reach a mass to do 30% CAGR value investing and then finally grow to MOATS where you don’t have to think about exit EVER.

 

Comments are welcome, lets open the Pandora box and have a debate on this.

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