Thread by @theBuoyantMan

This is going to be a thread about **Moat** and **Competitive Advantage**.

1. Capitalists seek the highest returns possible. For any possible investment, you need to maximize the return on investment while minimizing the risk involved. The sweet spot is what you strive to get.

2. You run a business to make the highest profits that you possibly can. If you're smart, you won't start or invest in airlines.

3. Most businesses that see highest returns on capital will attract competition. When competition comes in, return on capital decreases.

4. Very few companies beat the odds, defy economic gravity. Competition destroys excess returns.

5. MOAT comprises of structural and sustainable qualities that are inherent to the business. Moat isn't a hot product, not a cool piece of tech, not the biggest market share.

6. BIG is not a moat. Just the size of a company doesn't contribute to moat. LONGEVITY is not a moat. Remember what happened to Lehmann?

7. Moats generally manifest in pricing power. Companies that can't increase prices do not have an economic moat.

8. If a company is dropping the price of their product, their moat is eroding, it's an early sign of moat erosion.

9. Brands that lower search costs have high moats. These brands change consumer behavior by increasing their willingness to pay or lower search costs.

10. If a brand does not make you change your behavior, it does not have moat.

11. Patents are subject to expiration, challenge, and piracy. So, despite patents being legal monopoly, doesn't constitute towards moat. A portfolio of patents on the other hand - solid economic moat.

Example of portfolio of patents contributing to moat - ARM holdings, Qualcomm, etc.

12. License and approvals: Having license to do something that not many can do - contribute to moats.
ex: casino license, FAA certified aircraft parts manufacturing, etc.

13. If a brand delivers consistently aspirational experience, it widens the brand's moat. So, if something works, don't change it. Remember when Coke tried to change the recipe to match Pepsi after Pepsi-Coke blind test favored Pepsi more?

14. Switching cost. If the cost of switching to a competing product or service outweighs the benefits, that's a moat.

Ex: Big companies using Oracle database. They can't just switch to another db service very easily.

15. Network effect: If a brand provides a service that increases in value as the number of users increase, that's a business with potential moat tied to it.

Ex: FedEx, Visa, Mastercard, CRED, Facebook.

16. Cost based advantages. A company that invents a cheaper way to deliver a product, gets copied all the time. That doesn't constitute moat.

For ex: Southwest is no longer the cheapest airlines on a seat per mile basis. DHL lost over $1bn trying to beat UPS and FedEx in US.

17. Scale based advantages especially in distribution is very very high. A new player can't easily enter and dismantle the competition or take market share without incurring significant losses (like DHL).

18. Management:

Good jockeys will do well on good horses, but not on broken down nags. Even the best jockey on a goat will lose the race.

The worse the business, the better the manager needed. For a great business, genius managers aren't needed. In a good business, even bad managers will shine (ex: Ryan Air).

Microsoft - great business, did fine DESPITE Steve Ballmer.

New coke - didn't kill Coca Cola.

19. Airline business is an example of having great jockey on a goat. Despite having genius CEOs, most airline businesses will fail. They are at a strategic disadvantage with increasing costs. Planes get old. Employees become senior. Both demand more money.

20. Trust matters. Both online and offline. In retail, trust is the moat. Ex: Costco offline, Amazon online.

21. Good managers widen company's pre-existing moat. Amazon focuses on customer experience, Costco on using scale to lower costs.

22. Bad managers invest money outside company's moat, lowering the overall return on invested capital (setting fire to huge piles of cash). Ex: Cisco moving into consumer market.

23. When a business jumps outside of its moat, that's due to weakness and not strength.

For instance, Cisco's enterprise market hold was weakening is why they went into consumer market.

24. Value of moats: depends on reinvesting opportunities. Ability to reinvest tons of cash at a high incremental ROIC is a valuable moat.

25. Moats aren't limited to stable large caps that your grandkids could own. Businesses that pay cash are good. Businesses that can reinvest cash are awesome.

26. Overestimating moat - you pay for potential value creation that never materializes. You have large opportunity cost.

Ex: Motorola, created Razr phone, investors overestimated the hardware and assumed moat, and we all know how that went.

27. Spend more time on opportunity cost. Many investors spend more time on margin of safety and very little on opportunity cost.

28. Moat matters in the long run. Most investors own companies for short term. You suffer opportunity cost when you underestimate moat. If you're owning a company for the long run, pay attention to moat and opportunity cost.

29. Moat isn't always priced in. Great companies build moat incrementally as they grow. A large proportion of investors focus on short term price changes and not long term changes in moat.

30. Usually, quantitative data is priced in. Qualitative data is not well priced in. Understanding structural characteristics of a business, switching costs, customer behaviors, why companies increase prices - these are not well priced in.

All the information is usually in the past. All the value is in the future. These 30 points aren't exhaustive of what constitutes a moat. But these are good to get you started.

Read the book "The little book that builds wealth" by Pat Dorsey if you want to learn this in detail.