I recently read a stock pitch about a small company. One of the critiques it received was that a reader didn’t understand what the business’s moat was. Now, I invest in mainly small to tiny companies. Realistically, none of the companies I invest in have moats. Sure, a few may have first-mover advantages, intellectual property, or some other secret sauce that gives it a competitive edge, but they don’t have full-fledged moats. The best that can be said is that they are in the process of developing moats.
I’m not sure why this pushback raised such a strong reaction for me. I think it’s just a case of lazy thinking. When someone says, “Where’s the Moat?” in a thesis, it feels like surface-level thinking. Other examples are things like “Competition is fierce in this space.” or “Google, Apple, or <insert the name of a large company> could enter this market and kill this company easily.” These are all examples of obvious criticisms that seem intelligent but are almost universal concerns. If I think things like this when I read a thesis, it means I don’t like the investment but haven’t done any real diligence to determine why I don’t like it. So, I try to understand why a thesis turns me off rather than stop at my first impression. If you want to restrict your investing to companies with true moats, like Microsoft or Coke, that is great. I think you would do very well investing in that space. Small companies will very likely not exhibit strong moat-like characteristics - yet. There are examples of tiny companies with moats - regional advantages, unique hard-to-replicate assets, etc. But they are much more rare than at companies of much larger scale.
Sometimes, I think cheekily, “Do you want to talk about moats, or do you want to make money?”
BTW, the goat, Warren Buffett, didn’t concern himself about moats when he was a small investor. If you read his early writing, he was better than I will ever be about thinking about moats and competitive advantage, but his investments were often small, broken, or unloved. I feel like he did OK. His obsession with moats grew with the vast levels of cash that he had to deploy.
If you tend to look at the small, unloved, and undiscovered companies, then you will likely not be looking at developed moats. My dream remains to find a company that is creating a moat and to ride along with them as they do it.
Good post. Agree with your sentiment, we can regurgitate Buffett quotes all day or we can roll up our sleeves and do some work.
For me moat and competitive advantage is almost same thing... one of the questions I ask before investing into the company is “what is the moat? What is the competitive advantage?” And sometimes the answer can as simple as “ founder is the largest shareholder and has shown to be not afraid to fail forward” just as ONE example , there are usually multiple things as advantages and a lot of them are not the exact definition of Twitter’s MOAT and I do agree with you on that sometimes moat is in the making and sometimes it just doesn’t get made...