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Agenda
Morningstars
Where
Why
Moats Matter
Using
Whats A Moat?
Capital
An
Whats a Moat?
fThe
Assets
Brands
Patents
Approvals & Licenses
Customer
The
Switching Costs
Network Effect
Cost
Advantages
Process
Scale
Low-cost resources
assets
Brands: Does it increase the consumers willingness to pay,
or reduce search costs?
Sony vs. Tiffany
Doublemint & Juicy Fruit
Patents: Valuable, but subject to expiration & challenge.
Big pharma vs specialty pharma
Licenses & Government Approvals.
Waste haulers, aggregate companies
Examples
Technology:
Easily-replicable
Hot
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When
Management
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Wide
moats are tough to find. Less than 10% of the 1800 companies
that we follow have wide economic moats. (165, to be precise.)
Moats
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Time Horizon
No Economic Moat
ROIC
ROIC
ROIC
Time Horizon
Time Horizon
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Underestimating
Some
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15
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Long
answer:
Theres nothing wrong with no-moat stocks if purchased
at a sufficiently cheap price, they can be great investments.
Wide moat companies are neither better nor worse than no
moat companies theyre just different.
Understanding which companies in your portfolio have
competitive advantages and which dont can improve
portfolio management in two important ways:
Valuation
Position sizing & making good sell decisions.
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Long
answer:
Most market participants own securities for short time
periods, and moats matter much more in the long run than
over the short term. (Time-horizon arbitrage.)
Recency bias causes most investors to assume that the
current state of the world (good or bad) persists for longer
than it usually does.
Empirical evidence suggests that waiting for wide moats to
become cheap is a compelling strategy.
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Trailing
1-Year
Trailing
3-Year*
Trailing
5-Year*
-6.3%
15.5%
0.6%
6.5%
-3.9%
15.4%
-9.0%
-0.3%
* Annualized returns
Source: Morningstar
More on Moats
Competitive
The
Wiley, 2002) .
Berkshire letters are also free at www.berkshirehathaway.com
Competition
Annual
The
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More on Moats
The
Little Book that Builds Wealth, by Pat Dorsey (John Wiley, 2008)
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