Tuesday, May 23, 2006

Is your moat safe?

I just read an article


which got me thinking about moats. To me moats are not static things, they actually need care and feeding. Moats, like the tide can ebb and flow, and sometimes fail.

The article above talks about how newspapers in general were slow to respond to the internet. Instead of thinking of how to use the internet they ignored it...and now are trying to figure out how to stay as relevant in the future as they have in the past.

The best thing about the article is that it uses Target to make a point. Several decades ago when the parent company formed Target it was as a small part of a much larger company. But now the Target division IS the company.

What does this mean to a new investor like me. That in trying to figure out whether a company actually has a moat, it is also important to make sure that the castle itself is still relevant.

I mean think about the whole idea of a "moat" itself...

a moat protects a castle...but what happens if you got a 16 inch cannon which can fire a shell over and over into the castle and lay waste to it? I mean you still got a great moat..but no castle to protect.

Or think about all those forts that were placed at riverheads...they are all national monuments now because they are largely irrelvant...because they guard a passage that no longer controls the flow...everyone just went around them.

So thinking about a company that has had a moat that so far has protected it is pretty useless to me..it's helpful..but I want to think about what company (castle/fort) is going to or will in the future be able to take the necessary steps to protect the castle itself if needed.

Also it means that there are probably a lot of smaller companies which have a moat that has not been recognized. Target was there for everyone to see...most did not...I am sure some did. Figuring out the future moats (or figuring out which castles will stay relevant and/or can respond with newer moats) is the difference between Buffett, Munger, et. al. and everyone else.

Take Care