Investment Moat Masterclass in 40 Minutes

Are you looking at Economic Moat the right way?

“The orthodoxy of a (traditional) value investor is that you only bought companies that had a discount on their book value, or price to earnings multiple, and if you’re not doing that; You’re just NOT a REAL Value Investor.”

Wow, that’s a strong claim to start with. Particularly triggering to some too.

These words were articulated by Robert Vinall, from RV Capital (which manages roughly 300 – 500M in AUM) in one of his recent presentations, uploaded to YouTube on the 28^th of May with the video title “Five Moat Myths”.

It is an interesting watch (and I highly recommend you tune in, maybe on your commute to work), which is under 40 minutes. You can skip to the 8-minute mark as the introduction is mainly pleasantries and context, and you can skip to the 18-minute mark for the 5 main pointers.

The main point of contention or controversy revolves around how Rob is calling out the bs in the value investing space – which is still a core part of the philosophy that many people probably still hold dear to their heart.

Buying things CHEAP.

After having hundreds of conversations with investors from different backgrounds, I’ve come to realize that even though many claim to practice ‘value investing’… I don’t even know what value investing means anymore. In short, like 50 Shades of Grey, I’ve seen more than 50 shades of value investing.

In fact, I’ve made a video before about this idea of Value Investing.

Until today, I still personally hold valuations to high regard (i.e. an important factor in my own investment decisions). Over time however, I have also appreciated what friends in the growth/quality camp have been advocating for – looking for a superior company that is able to re-invest at a really staggering rate due to the superior business economics and runway.

The hard part?

Having the foresight to find them and stick with them (especially when they’re down).

I’ve summarized the 5 Myths Rob explained in the video here for your quick reference;

Myth 1: The Wider the Moat, the Better

The more important characteristic of a moat is not whether it’s narrow or wide, but whether it’s getting wider.

Myth 2: All Moats are Created Equal

The only time a moat is important is when you’re unhappy with the product (and can’t switch). There’s a hierarchy of moats…

Myth 3: Execution doesn’t matter

Moat is an output of great execution, which results in a great business. Some might confuse this with the famous saying from Buffett that he wants to buy a business so great, that an idiot can run it – but assessing the managers is still an important part of the investing framework. The ideal case is of course having a wide moat business, with a solid manager at the helm.

Myth 4:  Management doesn’t matter

Management can destroy and build the company’s moat – differentiating a great business from a failing one.

Myth 5: Moats always matter

If you imagine a world that basically never changes, then yes. Moats are important, and it’s the only thing that counts. But suppose you contrast it to a more dynamic environment – especially in modern times. In that case, it’s probably disadvantaged to have a moat because it’s going to make you fat and lazy, and it’s going to slow you down when it comes to reacting to competitive threats.

I hope this will give you something to consider for your portfolio of stocks.

Love, Chi Keng.