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The Power of Moats

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By FreeCashFlow0714
April 23, 2008

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http://www.beearly.com/pdfFiles/Sellers24102004.pdf

There's insightful stuff on the factors needed to be a great investor (some of which can't be obtained through experience or training).

The most interesting part was economic moats. One key element of a moat is that even a competitor who knows your secret cannot duplicate it. There are 4 types of economic moats:
1. Economies of scale and scope: Examples include Wal-Mart, Proctor and Gamble, Home Depot, and Lowe's.
2. Network effect: Examples include eBay, Mastercard, Visa, American Express.
3. Intellectual property rights: Examples include Disney, Nike, and Genentech.
4. High cost for customers to switch: Examples include Microsoft and Paychex.

Being an oddball consumer does have its drawbacks when it comes to identifying economic moats. I always thought McDonald's was mediocre, and I have steered clear ever since I saw the movie _Supersize Me_. I usually buy generic rather than brand name products. I've been avoiding Wal-Mart the last few years as well. Even before I started my Wal-Mart boycott, I didn't think it was that different from Target, K-Mart, and other big box stores. And I have no particular preference for Home Depot or Lowe's over Menard's and Ace Hardware.

I can see why eBay has an economic moat. Everyone (even myself) knows that's where to go to sell stuff online, and I buy printer cartridges there. eBay is even a word.

I can see why Mastercard and Visa have an economic moat. I don't carry a Discover card, because only a few places accept it, and I don't like to have multiple credit cards, since that means I have more stuff in my life to keep track of. What's the point of having a credit card if I can't use it? Any merchant that does not accept Mastercard or Visa doesn't take credit cards at all.

I'm not sure Genentech is that bulletproof, because it's too high-tech and we all know about the risks of high-tech companies.

I can attest that Disney has a very wide and very deep economic moat full of hungry crocodiles, alligators, and sharks. I grew up watching Disney movies and TV shows (like _Mary Poppins_, _The Richest Cat In The World_, and the Sunday evening ABC specials), and I've been to Disney World several times as well in my younger years. Even today, I like "Lizzie McGuire", "Hannah Montana" and "The Suite Life of Zack and Cody" even though I'm old enough to remember the Cold War, the Rubik's Cube, Pac-Man Fever, Betamax, and rotary dial phones. I have Britney Spears and Christina Aguilera CDs. I STILL enjoy Disney movies like the Halloweentown movies, the Narnia movies, and The Princess Diaries movies. Yes, I know that Disney is an artificial fantasy. Yes, I read the book _Fast Food Nation_, which panned Disney as well as McDonald's and shows how similar they are. However, the warm and fuzzy aura of Disney is so powerful that it overwhelms the cynical side of me.

I should analyze Disney, especially since Disney stock has substantially lower multiples than Wrigley. When someone as old, cynical, and brand-name resistant as myself just can't shake the warm and fuzzy feeling about the company, you know you're looking at a winner.