We increasingly live in a world where economic moats are built with software, reputation and network effects. The era of the daily, local newspaper, like Buffett’s Buffalo News, having a stranglehold on local advertising are long since gone. So where does that leave us? Todd Wenning writing at Intrinsic Investing looks at how investors should think about moats built on intangible vs. tangible assets. He writes:
The opposite is true with intangible asset-based moats. It’s easier to enter a market but much harder to scale in capital-light businesses. You could start a new social media company in your garage on a shoestring budget, but you’re up against significant network effects and switching cost advantages held by the incumbents. Further, it’s not always apparent which capital-light company is prudently scaling because they are expensing reinvestment, often resulting in near term, low reported profit margins.
Tren Griffin at 25iq in examining the success of David Chang and his Momofuku restaurant group takes to task those who think that an economic moat isn’t necessary for long-term success in business. Griffin writes:
Every business must deal with this simple fact of life: If you have too much supply of a given product or service, price will inevitably drop to a point where there is no long-term industry profit above the company’s cost of capital. Sometimes you will hear a knucklehead say moats don’t matter since all that matters is delivering better customer value via execution of a plan. The idea that the supply of alternatives to what you sell does not matter in a business is (1) insanity or (2) inevitably argued by someone who has never actually ran a real business or has not done so for very long. In the real world, competitors eventually can copy a plan of execution that has no barriers to entry. A moat is a “sustainable competitive advantage” that goes beyond execution to limit competition since it is structural. That is why it is so valuable. A business that even your lazy and shiftless cousin could run is significantly more valuable than a business that requires a first-class manager to run flawlessly day after day and year after year.
A business plan that can be easily copied isn’t sustainable. The only way of building sustainability is over time and with a great deal of effort, often unseen from the outside. Josh Brown at The Reformed Broker writes:
Rather than respond, go back to the lab. Make progress, a little bit every day. Chip away. Do your work in the background, off to the side, in the dark where no one else can see how slow and incremental that progress is.
Build things, arrange things, put things together, make things happen, set things up, acquire resources and allies. Long-term, strategic progress. Dig a moat around what you’re doing so it can’t be repeated. And when you know you have a lead, that’s when you really start pushing.
The so-called FAANG stocks have been much in the news of late, with a whole host of portfolio managers selling out of Facebook. There is no doubt that Facebook is facing a whole host of issues many of which they have only themselves to blame. However it is hard to see how a competitor overcomes Facebook’s economic moat any time soon. Government regulation could do it. A shift in consumers to Facebook’s Instagram could do it. Building a global, billion-plus social network from scratch isn’t easy.