Friends,
Of all the shareholder letters Warren Buffett has ever released, the 1986 version might be the most important. In it, he describes what made GEICO such a great investment:
"The difference between GEICO’s costs and those of its competitors is a kind of moat that protects a valuable and much- sought-after business castle. No one understands this moat-around-the-castle concept better than Bill Snyder, Chairman of GEICO." (bolding added)
The concept of a moat is the cornerstone of our investing philosophy. But it can be hard to describe to a new investor. It could also be called a/an:
- Sustainable competitive advantage
- Unfair upper-hand
- Edge that no one can match
But there's an even easier way to think about it.
Consider someone who gives you $100 billion and ten years to dominate any industry you like. Which market leaders would you not attack because time and money wouldn't be enough to displace them?
Whatever your answer to that question is -- those are the companies with a moat. In looking over all the stocks we cover, these five stick out as having the widest moats.
- Axon Enterprise: The company provides hardware (Taser stun guns and body cameras) and software (video footage, incident records, etc) to first responders nationwide. Imagine trying to re-train entire police forces to use a new software / hardware system that captures mission-critical data. The time, effort, and cost of switching would be huge.
- Amazon: We could talk about AWS (which is a fantastic business), but consider the e-commerce side. Amazon has nearly 1,400 fulfillment and delivery centers in the United States alone. That helps packages arrive on your doorstep for a lower internal cost than anyone else. Trying to match that scale would be an enormous headache.
- Coca-Cola: This is just sugar water. Any company could make it. And while we aren't huge fans of the brand being the sole moat, this one has stood the test of time.
- Costco: By its very nature, it'd be tough to beat Costco. The company offers its goods with razor-thin margins. The profits mostly come from membership dues. Replicating that at scale would be a waste of time and money.
- Intuitive Surgical: The company is nearing 9,000 DaVinci robotic surgical systems installed in hospitals worldwide. The machines cost over $1 million, and surgeons make their entire careers off of practicing on and using them. Getting hospitals and surgeons to switch is a non-starter.
Moats are just one aspect of investing -- but they're probably the most important one to us. Over the long run, they separate the winning investments from the losing ones.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long Term Mindset
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