{"id":217,"date":"2017-01-16T05:57:25","date_gmt":"2017-01-16T05:57:25","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=217"},"modified":"2017-10-25T00:44:34","modified_gmt":"2017-10-25T00:44:34","slug":"18-what-are-charlie-mungers-six-great-moats","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/01\/16\/18-what-are-charlie-mungers-six-great-moats\/","title":{"rendered":"18. What are Charlie Munger’s Six Great Moats?"},"content":{"rendered":"

\"\"Excellent Book: Charlie Munger For All Seasons<\/a><\/p>\n

In the old days, kings protect their castle from marauding hordes through use of a moat around the castle. To be efficacious, these moats should be wide, deep and preferable infested with sharks.<\/p>\n

Fast-forward to the 21st<\/sup> century.\u00a0 It\u2019s kind of the same thing now about investing in companies and industries. Against this backdrop, what would Mr. Charlie Munger have to say on this?<\/p>\n

    \n
  1. Be A Genius In An Area Where There Is Durable Demand<\/strong><\/li>\n<\/ol>\n

    In the 2015 Daily Journal Meeting, a man asked Charlie Munger a challenging question: \u201cSir, what do you think is the most misunderstood moat in business right now? What can you say about that?”<\/p>\n

    CM: In a sardonic but friendly fashion, Charlie Munger replied: You\u2019re going to ask a 91-year-old man? This reminds me of one of my favorite stories. “A young man comes to Mozart and says, “With your help I want to compose symphonies.” Mozart looks at him. A bit perplexed and says, “You\u2019re too young to be composing symphonies.” The young man suddenly feels thrown off. Too young? He quickly replies, “Look, you were doing symphonies when you were 10 years of age. Well, I\u2019m 21!” Mozart grins politely, “Yes, but I wasn\u2019t running around asking other people how to do it.”<\/em><\/p>\n

    This reply, a class act from Charlie Munger, is open to interpretation. My take on this is as follows: First, Mozart being a genius, means that you must be good at what you do. Second, there is always demand for music from Kings to common folks and I mean good music. (And I concede sometimes even bad music sells.)<\/p>\n

    So, be genius like Mozart in an area where there is durable demand. And that\u2019s the moat. Of course, Mozart died a pauper but that\u2019s another story.<\/p>\n

      \n
    1. Technology Can Wipe Out Your Moat, So Watch Out<\/strong><\/li>\n<\/ol>\n

      A long time ago, the Swiss watch industry enjoys a deep moat through Swiss technology and branding in the watch industry. However, the advent of Japanese digital technology almost wiped out the Swiss watch industry. And, credit to the Swiss, they adapted and adjusted. They came up with Swatch which is digital but based more style and fashion imperatives. And the Swiss watch industry survived. And they other things too. For example, automation and mechanization of the their watch making processes had reduced man power costs to a fraction of total production costs.<\/p>\n

      CM:\u00a0 \u201cThe perfect example of Darwinism is what technology has done to businesses. When someone takes their existing business and tries to transform it into something else\u2014they fail. In technology that is often the case. Look at Kodak: it was the dominant imaging company in the world. They did fabulously during the great depression, but then wiped out the shareholders because of technological change. Look at General Motors, which was the most important company in the world when I was young. It wiped out its shareholders. How do you start as a dominant auto company in the world with the other two competitors not even close, and end up wiping out your shareholders? It\u2019s very Darwinian\u2014it\u2019s tough out there. Technological change is one of the toughest things.\u201d <\/em><\/p>\n

      So, even if you have a moat, do watch out as technology can wipe it out. Of course, technology is not the only factor that can wipe out a moat but it is an important factor.<\/p>\n

        \n
      1. Be In A Domain Which Somehow Coagulates Into One Player Achieving A Super Dominant Moat<\/strong><\/li>\n<\/ol>\n

        Some domains, especially in the internet space, somehow come up with a player having a super dominant moat. Google and Facebook are companies which come to mind. There are good search engines like Yahoo and others before Google comes into being. Likewise, there are social networking sites like Myspace and others before Facebook comes into existence.<\/p>\n

        CM: “Google has a huge new moat. In fact I’ve probably never seen such a wide moat.”<\/em><\/p>\n

        If you have the foresight and capability to engineer the next Google or Facebook, go for it.<\/p>\n

          \n
        1. Lollapalooza Moat<\/strong><\/li>\n<\/ol>\n

          I\u2019ll define this a very strong unique moat which comes about through a confluence of factors. And Coca-Cola is a good example of this.<\/p>\n

          CM:\u00a0 The social proof phenomenon which comes right out of psychology gives huge advantages to scale\u2014for example, with very wide distribution, which of course is hard to get. One advantage of Coca-Cola is that it\u2019s available almost everywhere in the world. Well, suppose you have a little soft drink. Exactly how do you make it available all over the Earth? The worldwide distribution setup\u2014which is slowly won by a big enterprise\u2014gets to be a huge advantage\u2026. And if you think about it, once you get enough advantages of that type, it can become very hard for anybody to dislodge you.<\/em><\/p>\n

          In the case of Coca-Cola, the defining moat factors include:<\/p>\n

            \n
          1. Strong Social Proof through very wide distribution network<\/li>\n
          2. Economies of Scale<\/li>\n
          3. Strong Branding<\/li>\n
          4. Unique Flavor with no taste memory.<\/li>\n
          5. Strong, Able and Trusted management to keep widening and deepening the moat.<\/li>\n<\/ol>\n
              \n
            1. Newspapers In The City Moat<\/strong><\/li>\n<\/ol>\n

              This a kind of moat which is not supposed to be there given the sunset industry setting.<\/p>\n

              CM: There\u2019s another kind of advantage to scale. In some businesses, the very nature of things is to sort of cascade toward the overwhelming dominance of one firm. The most obvious one is daily newspapers. There\u2019s practically no city left in the U.S., aside from a few very big ones, where there\u2019s more than one daily newspaper.<\/em><\/p>\n

              And again, that\u2019s a scale thing. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So it tends to cascade to a winner-take-all situation. And that\u2019s a separate form of the advantages of scale phenomenon.<\/em><\/p>\n

              In this sun-set industry, the internet helped in a strange way. It wiped out other competitors and deters new serious competitors from coming in.<\/p>\n

                \n
              1. Specialization Moat<\/strong><\/li>\n<\/ol>\n

                This kind of moat comes about through specialization. For example, if you are the best heart surgeon in the world, people who needs heart surgery would still come to you even if you are a grumpy doctor who doesn\u2019t smile a lot.<\/p>\n

                CM: Similarly, all these huge advantages of scale allow greater specialization within the firm. Therefore, each person can be better at what he does.<\/em><\/p>\n

                And these advantages of scale are so great, for example, that when Jack Welch came into General Electric, he just said, \u201cTo hell with it. We\u2019re either going to be # 1 or #2 in every field we\u2019re in or we\u2019re going to be out. I don\u2019t care how many people I have to fire and what I have to sell. We\u2019re going to be #1 or #2 or out.\u201d<\/em><\/p>\n

                That was a very tough-minded thing to do, but I think it was a very correct decision if you\u2019re thinking about maximizing shareholder wealth. And I don\u2019t think it\u2019s a bad thing to do for a civilization either, because I think that General Electric is stronger for having Jack Welch there.<\/em><\/p>\n

                  \n
                1. Super Lollapalooza Moat of Berkshire Hathaway<\/strong><\/li>\n<\/ol>\n

                  This is a kind of moat Mr. Charlie Munger would not tell you about at least not directly lest it comes across a blowing one\u2019s own trombone.<\/p>\n

                  This kind of moat is what has been achieved by Warren Buffett, Charlie Munger and their team at Bershire Hathaway. Even tomes may not do justice to their accomplishments.<\/p>\n

                  This Super Lollapalooza Moat is achieved through three main factors as follows:<\/p>\n

                    \n
                  1. Have two genius super-investors combine forces.<\/li>\n
                  2. Practice Deserved Web of Trust. They engage great management they can trust and give them the deserved trust to manage. This is incredibly efficient in term of communications (minimizing time consuming checks and balances), internal audit (which becomes less onerous) and optimization of management talent (through negating the need for unnecessary headquarters intervention.)<\/li>\n
                  3. Be at Genius Level of (i) Choosing What to Invest at the right price (ii) Allocating Capital in the Optimal Way (iii) Correct Utilization of available float from within their stable of companies.<\/li>\n<\/ol>\n

                    This kind of Super Lollapalooza Moat<\/strong> is extremely hard to achieve. It\u2019s a tough act to follow which is why there is only one Berkshire Hathaway.<\/p>\n

                    https:\/\/www.facebook.com\/groups\/charliemungersays\/<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

                    Excellent Book: Charlie Munger For All Seasons In the old days, kings protect their castle from marauding hordes through use<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[3],"tags":[],"class_list":["post-217","post","type-post","status-publish","format-standard","hentry","category-investment"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/217","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/comments?post=217"}],"version-history":[{"count":7,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/217\/revisions"}],"predecessor-version":[{"id":918,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/217\/revisions\/918"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=217"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=217"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=217"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}