SalvorHardin wrote:Strong Moats. Like the moats surrounding medieval castles deterred attackers, economic moats provide some protection. These moats aim to fend off competitors who are looking to enter your markets thus reducing your pricing power and market share. Moats are things like strong brands, network effects, customer loyalty, product quality, patents and geography. Too often a company starts off brightly, then finds out that competitors eat into its markets and its shares end up on a low P/E ratio.
North America’s freight railroads have an excellent moat. No-one is going to build a new railroad and trucks can’t compete over longer distances because the laws of physics make it much more energy efficient to use rail. Also rail is much greener than the road, which gives it a political moat in these times. The geography of North America makes freight vastly more profitable than in Europe where the distances between major settlements are much shorter. About the only downside is that they are cyclical businesses, being so heavily integrated into the American and Canadian economies. My largest railroad holdings are Union Pacific (5.5%) and Canadian Pacific (4.8%).
Global Private Equity. These companies manage clients’ money as well as their own in a very wide variety of investments. Their “moat” is a combination of economies of scale, expertise and their track record. Canada’s Brookfield Asset Management (5%) is heavily into commercial property, infrastructure and renewable energy, whilst Carlyle Group (2.9%) and KKR (2.1%) are traditional private equity companies that are popularly called “asset strippers” but really own and operate a lot of long-term investments.
My other main “moat” companies are Warren Buffett’s Berkshire Hathaway (4.6%) which amongst other things owns the BNSF railroad, Disney (2.7%) is the world’s biggest entertainment conglomerate and multinational consumer goods company Unilever (2.1%). Also Bank of Montreal (3.7%) because it’s a Canadian Bank (regulators in Canada have created a moat for the big banks by being much stricter than Britain whose banks are very good at recklessly losing money).
As a rule, I avoid technology shares. This preference dates back to the dotcom boom of the late 1990s when several colleagues, having piled into all sorts of .com stuff, saw their dreams vaporise whilst I was generating annual returns for a few years well in excess of 50% mostly thanks to oil explorers like Soco International.
I see a lot of parallels between now and the latter months of the dotcom boom. IMHO some “technology” companies are little more than the equivalents of companies taking orders by telephone in the 1890s. Innovative at the time, sure. Ground-breaking and justifying enormous valuations relative to earnings? Not.
Salvor's excellent post on moats has got me thinking.
One of the companies I am thinking hard about is Taiwan Semiconductor Manufacturing Co. (TMSC)
A tech company in a high growth market, with a dominant position, and getting stronger. It has >50% market share for contract manufacturing of ICs for other semi companies, and this position obscures the fact that it is much more dominant in the newer small line width technology for higher performance devices.
The semiconductor business is a base industry for the 21st century - probably a bit like steel, oil and railroads for the last century. It is not a tech business that is likely to fold like a house of cards in some major scandal/consumer shift (I would worry about Facebook, for example).
It is hugely capital intensive, and while this might be considered to be an unattractive aspect, it is one that considerably adds to the 'moat'.
It is a sizeable operation, has companies like Apple as its major customers, a capitalisation of over $1/2 trn, and a share price that has quadrupled over the last decade.
The major risk that I could see would be a China invasion of Taiwan (indeed it would be one of the prizes that would be worth fighting for).
So: an enduring and rapidly growing market, a dominant worldwide position that combined with the capital investment required to challenge it means that it is not just dominant but intimidatingly so, and a high margin business.
This feels like it should keep getting better....
What am I missing?