MOATs: A must for Main Street, but less relevant on Wall Street?

Andrew DePascale

I recently revisited an investing thesis written by Charlie Munger, who has been Warren Buffett’s business partner for 40+ years.  He recently weighed in heavily on everything from SPACs to Bitcoin so the timing was prudent.

Buffett and Munger have built Berkshire Hathaway into one of the most successful and well known holding companies in the world. They work in tandem with a lean staff, carefully using a number of mental and financial models before investing in a company.

To keep it simple, Berkshire’s core principle in investing is buying great companies and holding onto those investments for many years. This approach is quite the opposite from today’s fast paced RobinHood environment.

A key piece to Berkshire’s investing philosophy has always been around economic moats. They also feel current market investors should start prioritizing them once again…

One could ask, What the heck are $AMC or $GME's moats?

If you’ve watched Game of Thrones you’re likely familiar with the term moat. For those that are not G.O.T. loyalists, a moat is simply a deep & broad water trench surrounding a castle, serving as a preliminary line of defense.

The kind of moats we’re referencing here is different of course. A moat in business is a long term advantage or protection a company has from new competitors or sudden industry shifts.

Munger states that he and Warren “often pass on good companies” if they feel the business has a weak moat, or none at all.  In their view, a strong moat is critical to the long term success of any business large or small.

Some Examples of MOATS:

A strong brand name (Coca-Cola),  distribution power (Amazon), lack of true competition (Google), or a massive user base with network effects (Facebook.)  

In rare cases they’ll even consider a brilliant & charismatic founder as a moat, such as Steve Jobs or Elon Musk.  Moats make it very difficult for a new company to take long term market share from a company, so you can see why understanding this principle is important.

Having a strong moat doesn’t mean others won’t try to storm the castle walls, but in most cases their efforts often fail. You also see this time and time again in sports.

The Chicago Bulls had a moat for many years in the 90’s, and the the New England Patriots under Tom and Bill seemed to almost always prevail.

This line of thinking prompted me to ponder why some small businesses continue to thrive and fight off competition, while others unfortunately fail? The answer is often the same as larger public companies, moats!

During COVID the moat principle showed itself in a very strong way. Of course, there were many uncontrollable outliers that hurt businesses, especially in the fine dining and hospitality sectors. But there were also many that were able to stand their ground when others in the same industry could not.

Can You Identify A MOAT on Main Street?

Everyone knows of a small business in their town that always seems to endure no matter how many competitors pop up, or whatever else gets thrown at them. Pandemics included.

They often have a very strong moat, whether on accident or on purpose. The most common small business moat is of course location in a retail setting.  In a post-covid environment, smaller moats can also easily be built.  Ex: (Easy to use website, online ordering, fast delivery.)

I know of a coffee shop located perfectly across the street from a major university with a steady flow of student traffic all day long (moat.)   In my hometown there are two of the top rated pizzerias in NJ that have a strong brand name because they have a great product and been around for decades (moats).

I think anyone considering opening a small business, especially post-covid, should think critically about the moat principle in their business plan. Failure to embrace this concept leaves far too much to chance.

An example that comes to mind for me is the frozen yogurt chain craze a few years ago.  New stores were opening up like crazy, and early store owners did very well with long lines out the door during the summer.  

But where was the moat?

The model quickly became very easy to replicate and many of those stores are no longer around.

Can you identify a small business with a MOAT in your town?