Friday 18 May, 2018
You can tell a deep value credit person a mile away. We almost always cite Warren Buffett as our wannabe mentor. We like nothing better than investing in strong boring businesses that provide a necessary function with solid long-term management teams, thoughtful strategies and reasonable balance sheets. We have a mantra on our desk "boring is good". Even beautiful. Most business books are unreadably awful but I loved Buffett's biography, "The Snowball", and my dad's favourite book by Buffett's mentor, Benjamin Graham, "The Intelligent Investor". If you only read two business books...
With that in mind and not owning either the shares or the bonds, I checked out Tesla CEO Elon Musk's remarkable Q1 conference call the other day for entertainment. In it, after a while, he basically blew off a couple of Wall Street analysts and went to twitter crowdsourced investor questions. Now I've been listening to dry conference calls for 25 years and the general sycophancy that comes with it: "Great quarter guys!" and my personal favourite just prior to the GFC "uh, given you are, uh, arguably underlevered...". With no skin in the game, I found Musk's remarks less stunning than news outlets made them and in tune with my own views that the investing landscape could do with a freshening up. But it was his antithetical to Buffett's view on moats that struck me most. And, reluctantly, I think there might be some truth in it.
"First of all, I think moats are lame," Musk said. "They're like nice in a sort of quaint, vestigial way. But if your only defence against invading armies is a moat, you will not last long. What matters is the pace of innovation. That is the fundamental determinant of competitiveness."
When I look back on the mistakes I've made investing it's being either too early – great being underweight but why on earth did I lend to any of those telecom start-ups at all? Or a too rear-view approach - local business owners need to keep advertising in the (boring, stable) Yellow Pages right? Anchoring bias. Got to love it. However, I've also been lucky to have spent most of my career investing at a time that has seen the vast consolidation of multiple industries from an average of six players to three. That has given a whole host of companies moat-like pricing power and has made for a great investing environment for a deep value credit investor. So it’s quite a mind-shift to believing that those moats are now only illusory. Or at least not wholly so.
That's because the pace of change is accelerating so fast that larger consolidated companies may finally be at a disadvantage in their inability to adapt fast enough. When 5G telephony is rolled out, the value of that precious cable connection into the home is going to come down fast. Yes, you can consolidate with wireless telcos but that only holds back the barbarian armies for a while. Tech and pharma giants recognise this and have been using their considerable balance sheets to buy the competition. I do wonder if this will continue to be a successful strategy as we accelerate ever faster. One of the other moats is the ever-growing cost of compliance that larger companies can amortise over a larger revenue base. However, that cost is coming down fast now as nimble tech start-up businesses help automate previously cumbersome processes, eliminating bureaucracy. Will the larger companies be able to keep up with a level playing field?
Finally, in the war for ideas and talent, the smart kids nowadays just aren't that into hierarchies, suits and ties and working their way up the corporate ladder in companies who feel they have some metaphorical moat that gives them time to adapt. The up-and-coming generation know they don’t have that luxury but will they?
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