Time and again, we hear/read that investment in companies with heavy "moat" are key to successful investing career. Investing in a couple of them at right price will ensure that you can spend your life after retirement at a beach (or any place, you think is better !) with a chilled beer in your hand.
But if finding the sustainable "moat" had been so easy, then nobody would have cared and sought it so vigorously. And the reason why finding "moats" is not easy is that one has to look beyond raw numbers to ascertain whether a business have a sustainable "moat". Good Numbers (Ratios, quarter on quarter results) can only provide support to the view of moat's existence and in itself can't assure moat existence. So, its one's own business sense, which can help him ascertaining it. As mentioned by Mr. Buffett " I am good businessman, coz I am a good investor, and , I am a good investor, coz I am a good business man".
So, to be an outstanding investor (which in my case is the one who beats the average on a regular basis) one needs to have an uncanny ability to judge the business on qualitative aspects such as :
1) Management : Managers like Ajay Piramal, Sunil Bharti Mittal, Ratan Tata, Steve Jobs etc. at helm in itself are a moat to business as they have phenomenal capital allocation ability)
2) Products : Products such as Colgate, Coca-Cola, Cadbury's, Surf, Google, which have itself become the face of the industry and are always first to strike our mind when we think of that industry)
3) Barriers to Entry :Where entrance in the industry is restricted by number of factors such as Government's restriction, Intellectual Constraints, High Capital Outlay, Monopolistic or Duopolisitc industry dynamics (For e.g. Motorcycle industry in India, where still a large chunk of market share is captured by 2 player namely Bajaj Auto and Hero Motrocycles)
4) Economies of Scale (Where the organisation such as "Walmart" grow to such a level that they get the power to squeeze supplier's or buyer's to the possible extent and add muscle to their top line, bottom line, middle line, side line, and every line available in this universe)
5) Other's : Other Qualitative aspects which can be judged only by seasoned qualitative investor's or one with outstanding business sense.
As you can see, judging a company on qualitative aspect is not that easy as it seems while reading Mr. Buffett's letter, Philip Fisher's material. One needs to go and check for the data in terittories such as customers, suppliers, competitors, management meetings etc. and then make decision based on the information, which can be really difficult for passive investors. Often, while judging the company qualitatively, one experiences behavioural biases (you knew, that it will be coming !!) which are the one of the most threatening enemy for an investor. These behavioural biases are results of the decision making on something "Unknown & Unknowable" , in other words, which can't be judged with absolute correctness.
So, with all this gyaan, do I mean to say that we can't be a good investor if we are not good at analysing the qualitative aspect. No, as there is another ideology for investors like you and me: Quantitative approach.
Ben Grahams - Net Net, Debt capacity Bargains, Special situation investring and Joel Greenblatt's Magic formula are few out of those quantitative approaches which have outperformed the averages satisfactorily over a period of time. As rightly said by Mr.Buffet "buying extremely cheap, will ensure that even a mediocre selling price will result in outstanding result". And a testament to these techniques is the fact, that Mr. Buffet in itself started its own business partnership with these quantitative approached and later on graduated to "Qualitative" approach. He also asserts that he is "85% Ben Graham, and 15% Fisher".
So, to conclude, find your own calling, as to whether you are a "Qualitative" investor or a "Quantitative" investor ? Venture out in Market as per your own "Circle of Competence". So, be assured, that even with quantitative approach and disciplined attitude in market, you'll be able to spend you post retirement life at beach (Whether Bondi Beach or Calangute beach, will depend on your own discipline !!!)
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Cheers !
Tony Stark
(CEO - Stark Capital)
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