Tren Griffin @trengriffin I work for Microsoft. Previously I was a partner at Eagle River, a private equity firm established by Craig McCaw. I am on the board of directors of Kymeta. Dec. 24, 2019 3 min read

1/ People often get confused how the existence of a moat translates into a better investment return. The moat increases the probability that the business will continue to earn returns on capital that substantially exceed the opportunity cost of capital. 

2/ An emerging business may have qualities that may result in a moat, but actually having a moat requires that for 3-5 years the business earn returns on capital that substantially exceed the opportunity cost of capital. The moat test is quantitative. 

3/ "We’re trying to buy businesses with sustainable competitive advantages." The problem is these businesses can have high market prices. "If all you needed to do is [determine which businesses have a moat], everyone would make a lot of money. But that's not the case.” Munger

4/ The subject of identifying moats reminds Munger of a man who asked Mozart how to write a symphony.

Mozart: "You're too young to write a symphony.”

Man: "You were writing symphonies when you were 10 years old."

Mozart: "Yes, but I didn’t have to ask people how to do it.”

5/ "We buy barriers. Building them is tough. We’ve bought them. If you’re buying something at a huge discount to its replacement value and it is hard to replace, you have a big advantage. One competitor is enough to ruin a business running on small margins." Charlie Munger

6/ "Frequently, you’ll look at a business having fabulous results. The question is, ‘How long can this continue?’ The only one way to answer that is to think about why the results are occurring now – and then to figure out what could cause those results to stop occurring.” Munger

7/ "It is a rare business that doesn’t have a way worse future than a past. Over the very long term, history shows that the chances of any business surviving in a manner agreeable to its owners are slim at best. Technological change is one of the toughest things.” Charlie Munger

8/ "No matter how wonderful [a business] is it’s not worth an infinite price. We must have a price that makes sense and gives us a margin of safety.” Munger

Determining that business X has a moat is only one part on an investment process. It's an important step but isn't enough.

9/ Jim Chanos describes a tailwind for buying a long the market index: "Over time stock markets rise more than fall."

Munger points out that for an individual stock the trend isn't a tailwind. "The perfectly fabulous economics of a business can become grievously impaired.”

10/ An investor must "discriminate between when technology is going to help you and when it’s going to kill you. There are all kinds of wonderful new inventions that give you nothing as owners. All the benefits from great improvements sometimes flow through to customers.” Munger

11/ "Almost anything at a price can be good, not everything. Everything at a certain price can be bad. If you pay too much, you pay too much and that doesn’t change.” Buffett

Buying moats at a discount to value is an objective. Buying a moats at a premium to value isn't wise.

12/ Munger: "If the gap between value and price isn't attractive I go on to something else. [Even if a business has a moat]. I can’t reduce investing to a formula."

"Once you’ve found the best investment, you measure everything against that because it’s your opportunity cost."

13/ "Most people aren’t going to find thousands of things that are equally good; they’re going to find a few things where one or two of them are way better than anything else they know. The right way to think about investing is to act thinking about your best opportunity cost."

14/ Even if a business is fortunate enough to have a moat or hope of acquiring one, its life can still be nasty and short. Since factors creating moats can be brittle and related phenomena work in both directions, a moat can be torn down faster than the time it took to create it.

You can follow @trengriffin.


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