Announcer: 00:00 You’re tuned in to the investing for beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew and Dave, to decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.
Dave: 00:35 All right, folks, welcome to investing for beginners episode 79 tonight. Andrew and I are going to talk about moats, competitive, both business advantages, all the things you look for in a great business, and we’re going to talk a little bit about some of the ins and outs of those as well as some things to look out for and how you can find great companies with moats. So Andrew, why don’t you go ahead and start us off and talk a little bit about moats.
Andrew: 01:00 Yeah, let’s do it. Shout out to Warren Buffett, right? He kind of came up with this idea. What’s a moat, other than the margin of safety. I don’t know if they use that for the margin of safety metaphor also, but you know, uh, I’m assuming most of you don’t have castles and don’t have a moat. So we’ll explain that real quick. Uh, if you had a castle, your try the defendant against attackers who might be pounding at your walls. So if you build a moat and you fill it with water, they’re going to have to, although I guess swim across and you can pick them off.
Andrew: 01:35 And so that helps you stay competitive, right? It will help a business stay in business. And so it only makes sense if you can find the businesses that are the most competitive, those will tend to have the best results. And so they all tend to take up more market share, be able to get more profits, and that in turn leads to more returns for the investors. So buffets talked about different types of Moats, uh, some of the ones he looks for. There are a couple of other ones I think we can kind of throw in the mix there, and I’m sure he looks at that stuff to a first on the list. Let’s talk about pricing power. So the kind of logic behind this one is when you have a business that you’re able to increase the price without the, without losing sales, then you have pricing power. And that’s a very, very strong moat.
Andrew: 02:36 Easy example, simple example of this, was one of Buffett’s first and most successful investments that the city ever had. It was, I don’t know if it was called the Washington Post or fills a different, it was, it was a publishing company and because they had distribution to whatever cities they were servicing, they, they essentially had to, had a monopoly on the, on those select areas. And so because they were the only newspaper in town, they were able to raise their prices, and people will continue buying them. People will continue paying for it simply because there wasn’t any other alternative option. The government will try to regulate these things and make sure that there aren’t monopolies. So they will try to mitigate any company that can use basically, forced their hand and, and use the, you know, bullied their way to, to higher prices that the consumer has to pay so the government will step in and try to avoid as much as they can.
Andrew: 03:49 But you know, there are also ways that a company can have pricing power by having like a superior product, for example or a product that’s just in such high demand that people will continue to buy it no matter what the price is. So I wrote in the daily email the other day, I said, uh, as an example, if you had somebody who had a product that was proven to be able to make you younger, I think you could enter the market at $100 and then 150 and $200 and people will continue to buy it because it’s something that’s so high in demand. You have pricing power and the very strong business model.
Andrew: 04:31 So the way, it works nicely as with pricing power. It’s something that’s Kinda happened in the background and consumers don’t tend to really notice it happening too much in the end if they don’t know this, and that’s how you can tell they’re doing it the right way, so a lot of times they’ll they’ll rise with inflation and then maybe add a little bit on top of that and so you’ll get earnings growth just strictly from that price increase, so you don’t have to spend money on acquiring new customers. You don’t have to kind of expand into new markets. You can be just a regular old company with its reliable product, and if you’re able to increase the price gradually over time, you can see that will create earnings growth on top of a, you know, without having to grow in other ways and so it can be very efficient. It can be a very low-cost kind of way to grow earnings and they can that can compound into other things too, right? If if you have a product that’s strong and it has this pricing power, then you can have this capital that you can either return to shareholders, you could be reinvesting it in other kinds of business ventures. You can start to create like an empire in that way within the company.
Andrew: 05:53 I think another example of maybe like I’m present a business model would be something like see’s candies, which I know again, the poor, they’re Stansbury likes to talk about on his podcast. People continue to like chocolate, and they like to buy chocolate, and people love that CS product. And even if somebody says, Hey, I’ve come up with this new science innovation on chocolate. People Kinda like their old reliable things, and it’s not something like a technology product where it might go out of fashion tomorrow. This could be something that a might be a little bit boring, but people like it, and it has pricing power because, uh, you can continue to increase the price and you can observe it too. You can look at what’s the price of this before, what’s the price of it now? How, how’s that compare to inflation? Um, do they have pricing power in this way? And it can be a great way to run a business and have a strong business model.
Dave: 06:54 Yeah, those are awesome, awesome ways. And companies that kind of popped to mind when I think of pricing power, a Coca-Cola think about, you know, people have loyalty to that, and you think about Amazon, you think about Apple. Those are all companies that just immediately spring to mind when I think of pricing power that they will be able to target really kind of whatever they want because they’ve built such a, you know, a great product that people want it and they’re willing to pay whatever price there is for it to get it. I mean, you and I talked about Amazon prime the other day, and you admitted that you had pretty much pay whatever it took to have that product and have that ability to get things, you know, almost immediately. And you know, the cool thing about the conversation about most that we’re going to have today is a lot of these different ideas that we’re going to talk about there kind of.
Dave: 07:54 Some of them are very intertwined with each other. You know, when you talk about pricing power, you can also talk about products and brand loyalty and you know, some of those other things and they all just kind of feed off of each other. And once the company achieves that kind of staying power, if you will, then really the world is their oyster. You know, they could really do whatever they want and kind of go down the path of being a really successful company. Even if they’ve been around for 10, 15, 20 years, they’re going to continue to grow the revenue and the earnings simply by the fact of the pricing power that they have. They can continue to raise prices even if it’s gradually, you know, over a long period of time, which will help grow the revenue. Even if they’re not selling. You know, if even if they’re selling you the exactly the same amount of iphones that they sold two years ago, just by the sheer fact of they can raise the price on this, that’s going to help their bottom line and that’s one of the advantages and the strengths of owning a company that has a moat.
Dave: 08:58 And that’s why we look for those when we’re trying to find great companies to invest in. So I guess kind of going off of that, let’s talk a little bit about brand loyalty versus commodity products. Or when I think of brand loyalty and you know, I obviously think of, you know, my wife lives and dies by Starbucks, so you know, she has to go there every single day to get her coffee and it doesn’t matter that I make her coffee in the morning before she goes to work. She still has to stop at Starbucks and get her quote unquote fix.
Dave: 09:29 And it has a loyalty to her that she’s willing to pay the five, six, $7 for a cup of coffee every single day. Even though she’s already having coffee at home. And she’s probably having coffee at work, she still has to have that, that coffee and it doesn’t matter where we go, where she goes, it always has to be Starbucks. If we’re in Minnesota was where we used to live. Caribou was kind of the second competitor, if you will, but it never held a candle to her to Starbucks and she was willing to drive across town to a Greek coffee at Starbucks versus going across the street to Caribou. So it just really, to me that showed a very much the strength of the brand loyalty that you think about Nike, you think about Adidas, you think about apple, Google, you know, think about the, how Google has its tendrils into all the different aspects of our life and what kind of pricing power that has and the brand loyalty that, that, that brings to a company now, whether or not you can invest in these companies at that time, it still gives you an idea of what you’re looking for when you’re trying to find a company that has a moat.
Andrew: 10:45 And so yeah, if you can build. So the way, the way I kinda like to do it is so far, I’m in the four years of, of run the, their portfolio. I’ll, I’ll say, um, how do I, how do I make this simple, not too complicated? So the thing of the. So there’s upsides and downsides to buying stocks with strong brands. Um, and this can get a little confusing. I’ll try not to go too far into the weeds here, but basically when you have a stock like let’s take Nike. Nike came out, they’ve built a really strong brand. Now what makes it hard to find stocks and to value stocks that are essentially brand stocks is a, there’s no hard and fast rule for these stocks on the balance sheet. So when you have know, think about how you find great stocks and how we’ve talked in the past, you would want to buy stocks that have a lot of assets are assets, assets are things like cash, um, plants, factories that can build products, those are going to be all assets, but the brand doesn’t, doesn’t hold a value and the balance sheet and unless it gets sold to another company.
Andrew: 12:08 So basically let’s say Nike got bought out by Adidas, they would put an asset value for the Nike brand inside the dea. This is balance sheet, but as it stands right now, because Nike hasn’t sold the brand to anybody, their brand essentially doesn’t show up in the balance sheet. And so that can make finding these stocks and really finding out their true value. Kind of confusing and a little bit less scientific. So the reason I bring that up is because the way I’ve been able to invest in brands so far is I’ve been able to buy these companies that have portfolios of brands. So the last stock I recommended in the leather, a recommended a three months in a row. This is a stock that has multiple brands spending multiple industries, some of them kind of related, some of them not, so they’re able to take advantage of some of, some of the better competitive, you know better. I hate to use the word synergy because it’s so kind of, um, such a word, so wildly used to justify oracle m and a’s, but uh, when you have synergies or you can have this factory that can manufacture this product, plus that product, then it can make sense to have a portfolio of these various products and brands.
Andrew: 13:34 So like the stock I recommended last month, they have brands in these, similar to like the Starbucks thing where it’s a, it’s essentially a commodity. It’s a pro. It’s a product that uh, you could basically get from China and it’s very close to the same kind of performance, if you want to call it that. So like a candle for example. They have a really strong candle brand. And uh, from what I can see, I mean it just looks like a candle. Maybe it smells a little bit nicer than some of the other ones, but a manufacturer and kind of copy this product.
Andrew: 14:13 It’s not going to be terribly hard, but where the value is there is in the brand and so just like Starbucks has its own loyal following. This candle company has this brands a loyal following. They have something similar in the baby industry things good industries. So they, they spend a lot of these different industries and because a lot of that stuff was kind of sold off and acquired a divested and basically merged a lot of moving parts than those showed up in the balance sheet. And I was able to scoop up a company that had a portfolio of brands and those brands were in the balance sheet. And so I was able to show with numbers that I’m getting a great deal based on these assets and picking up some nice brands along the way. I did that two, three years ago with Hormel, uh, not currently a strong by now because it did rise in value quite a bit since I bought it.
Andrew: 15:15 But again, similar type of situation accompany with lots of brands in the grocery space. If you go to a grocery store, you will see a ton of brands that they carry anywhere. Anything from a, I think they own the Skippy brand, uh, that you could get a protein, muscle milk from them. You could get spam, you could go all sorts of places on the grocery store and be picking up a Hormel product and that’s all going to my bottom line. So you can find times where either you know, whether it’s a company that is temporarily be that because the industry is not looking particularly bright just for the next couple years, whether that means a waiting until a brand gets acquired by another company and now shows up on the balance sheet. And now you have a great price to book ratio along with a brand, a strong brand that you can buy.
Andrew: 16:11 Those are the types of things you can do. And those are the ways you can get into some of these competitive moats, uh, and, and stocks and businesses that have, that have these kinds of characteristics without paying like a steep price on something like an Amazon where a buying that stock right now is very, very expensive. And you know, if you were look at Amazon’s balance sheet, I think it’d be the same way the actual Amazon brand is not being reflected on that balance sheet. So regardless of what sales are or earnings is going just based on the balance sheet perspective alone that brands not really showing up. So I think there’s a lot of kind of intricacies and things to consider when it comes to looking at a brand. It can be very strong, but make sure you have the numbers to back it up as well.
Andrew: 17:01 And unfortunately that’s kind of the nature of it. I mean, you can’t, you can’t put a hard and fast rule on the brand like a, if you know, you give you, you had a, if you haven’t invested in another country who comes from a country where they don’t drink coffee and you try to sell them, hey, you know how the Starbucks brand, I’ll sell it to you for to $2,000,000,000. They might look at you crazy because I think there’s some sort of cult going on and they don’t understand the power of that brand. And so in the same way, there’s a lot of industry experts and a lot of all these different people trying to put values on these different brands. And so it’s not as cut and dry as like, oh, I own a piece of real estate and it’s worth this much and it’s priced this much on their balance sheet. So that gives you some stumbling blocks when it comes to looking for companies with brands. But I think you might not be able to invest in all the brands that you want to, but you can still get some great brands. Uh, as long as you do your due diligence and kind of invest in the normal type of way.
Dave: 18:06 Yeah, those are great. Those are great examples. And finding great companies that own other great companies is a fantastic way of identifying companies that have a brand loyalty or emote to them. You know, we think about our grandfather in the investing world, Warren Buffet, do you know, his, his company is really a vehicle for purchasing other companies. You think about, you know, what he’s done with Geico and some of the other companies that he’s bought, you know, they’ve helped him create a mote for him, you know, in and among of himself with his own company and he’s used the money that he’s developed from those to, by other great companies and to invest in other businesses like American Express and Wells Fargo and Coke and some of those other companies. So there is a lot of upside to finding, you know, a brand will accompany that has brand loyalty and, and you know how that moat can help the business know, be productive and profitable for you as an investment.
Andrew: 19:15 And kind of seguing off of that, think about the superior products you think about a company that we haven’t mentioned so far. Disney, think about the products that they have with the movies, the franchises that they’ve purchased recently. Think about the star wars, you know, Sagas and all the different ins and outs of that. We’ve discussed that a little bit in the past and you think about some of the other franchises that they’ve bought. I’m going to blank on them now. Uh, but they, that’s free heroin. Yeah, exactly. Is that the DC or the marvel stuff? Okay. I get it mixed up some time. At least we got one. One of them. I don’t follow those as closely as some people do. So I guess my point with that though is that they’ve created a superior product. You know, you think about they’re a Disneyland and Disney world.
Andrew: 20:09 The amusement parks that they have, those are superior products and the customer service that they provide at those places is just, it’s out of this world. It’s top notch. It’s what other people aspire to be. And so they’ve created a superior product which has helped them create a moat and it’s created a dynasty in a, in a business that’s going to last probably into our grandkids timeframe. And that’s an unusual thing in our day and age in our world. And those are some of the things that you can look for when you’re looking for a superior product. You will think about, you know, the cell world. Do you think about Apple when you think about Samsung, they have definitely distance themselves from any other competitor. So much so that Microsoft gave up their phone and I don’t know how Amazon and Google are doing with errors, but it’s definitely not a major player in the market.
Dave: 21:04 It’s definitely those two have created a superior product that everybody wants and are willing to pay any price for. If you’re an apple person, you’re going to be an apple person. If you’re a Samsung person, you’re going to be a Samsung person. And that’s really kind of it. And so when you’re looking at companies to invest in trying to find, determine whether this company has a mode, you think about those kinds of superior products and what kind of impact it can have on the business and how much it can sustain the business through the tough times or the good times as well. So those are, that’s definitely something that I definitely keep an eye on. I love that point about Disney too. There’s an example of combining superior products. Uh, you combine the amusement park with the great franchises and you get this thing, it kind of snowballs on itself and it just gets more and more exciting than it makes.
Dave: 22:00 Each superior product combined makes both of those even better. And it’s like, how do you compete against that? Yeah, exactly. I mean, you think about the Frozen phenomena that happened a few years ago. Oh my goodness. I mean, you know, as somebody who has a daughter that went through, you know, watching that movie when she was very young age and the clothes we had to buy and the towels that we had to buy, the toys, we had to buy the dolls. I mean, oh my goodness, you know, just, you know, the soundtrack. I mean everything about that whole thing is just a huge moneymaker and it shows the, the brand loyalty and the power that that company has by creating such a superior product and you’re creating something that everybody wants to have. It’s, it’s, it’s truly amazing to watch. And it’s almost as the profits naturally take care of themselves later. Yeah, exactly.
Dave: 23:08 Alright. So we talked about some of the stuff very intertwined. Like you said, a lot of the different examples you can come up with can check many of these boxes. I think one that’s maybe not so obvious and not talked about a lot. Um, but obviously we like to talk about that because that has to do with financial statements and the numbers is going to be a stronger financially with their balance sheet and then just a longterm health wise. So I think it only makes sense to me that when you have two competitors and one has a lot of debt and one has not that much debt, one has a lot of cash, the other one has a lot of debt. Uh, which one do you think’s gonna be able to last because you know, there’s always going to be bull and bear markets.
Dave: 23:54 So, at the time when profits get pinched, the one with cash that’s going to be able to continue reinvesting in their business, making it stronger, whereas the other one is going to have nothing to reinvest. If anything they’re going to be having to pay off debt. So I think that’s one very tangible way that you can try to find a company with a competitive moat. And sometimes it’s not hard to, to look at these industries and, and you just look at the balance sheet. You look at what these companies own and how much they owe and what the assets and what the liabilities are, how much cash they have is, is right there so you can see these things right away and you can see that even inside of industries between competitors, there will be some that are much, much stronger than others.
Andrew: 24:39 And so, you know, sure, you might have a company, maybe not, maybe something that’s not as a why the Vimeo is like a Disney, right? But let’s say, um, something where the much smaller and maybe the industry is much more competitive if you, if you kind of zoom out and look at the long term thing, not to say everything’s a guarantee, but you’ll tend to have those businesses that can reinvest more in themselves, probably are going to make better products, which can lead to brand loyalty, which can lead to pricing power, which can create more superior products. And they can all snowball from there. But you know, was, was that possible? Unless they’re able to reinvest in themselves in the first place. And how do you create a situation where you can reinvest in yourself? You’ve got to have a strong balance sheet, you got to have great business health and you go, Golly, I’m able to spend the money without really crippling the business.
Andrew: 25:32 And so I think that’s a really fantastic thing to look at is, and it’s very simple, uh, unfortunately it’s, it’s kind of intimidating and not something that you can talk about much because it’s just kind of a, we looked at it and that’s the picture and that’s it. So, uh, you just kinda gotta have faith that you line your ducks up in a row and, and, and the rest of it we’ll take care of itself. So almost in a way you have different kinds of stages of competitive moats, competitive mote building. And I think having a solid business foundation can really be a great beginning to getting you there. A lot of businesses kind of take the opposite approach, right? Where they’ll just kind of spend like mad and then hope that that spending turns into a strong mode which will turn into strong business health.
Andrew: 26:24 And you know, that certainly works out every once in awhile too. But I think that’s more the exception than the rule. So why try to invest based off the exception? Why not try the invest in something that’s a little bit more reliable, do it the way like buffets done, uh, when he bought Coca Cola, they had great business health and they had the, if you go back and look at their financial statements, you could have graphed their earnings just in a straight line and it was that way before he bought it and after he bought it. And this is very reliable, consistent, slow, not necessarily slow but not fast. It was just very consistent and kind of plotting along and getting like a good, decent growth. And it’s continued that way for decades. So where are you get to a point like that is having strong business health that allows, opened so many doors and allows companies to do so many things. And it’s a great situation to be in. As an investor. You have a kind of, regardless of where the company goes on the short term and how their earnings performance goes, when you have strong health, you’re able to collect dividends, you’re able to see a stable business and that can really help the place that the company is positioned in the marketplace and in the market share kind of competitive field brings a lot more stability and that can lead to longterm results.
Dave: 27:53 Yeah, those are. Those are excellent points and I agree. It’s certainly not something that’s talked about very much mostly because it’s a lot harder to quantify and looking at dissecting the company via the business. Health is not flashy. It’s not sexy. It’s more about, as you said, building a base and then using that base to catapult their business into a better position. Another aspect of a moat to that it’s not discussed at all is would be areas like patents, goodwill and tangible assets, assets, and when I think about those, I think about something like a patent is a business contract or a wiggle. I will and that gives you the power to continue doing what you’re doing and when I think about patents, I think about something like a Qualcomm, for example, a company that has created microchips and they use patents to control the power of what they’re creating and help fight off competitors from copying what they’re doing. And it gives them a moat because they could sell what they create at a price that people will pay because they’ve created such a great product. It will allow them to price it at a place where that will make them competitive as well as profitable. And it’s really hard to fight patents. Uh, the legal aspects that go into that is very, very costly. And so it’s, there’s always a race to a create something new and to get a patent on it because that gives you the power to price it and you know, continue to your business. And that’s one of the aspects of the technology world, which Andrew is going to know far more about than I do because that’s what he does for a living. And I’m going to actually let him chat about that a little bit more.
Andrew: 29:56 No, nothing that, I mean you’ve covered it greatly. Um, yeah. I think with manufacturing, obviously that tends to be something more important than like, uh, going back to our previous examples like Disney. Um, but, you know, yeah, uh, definitely can become a great moat when, when you have a couple of key patents that really drive the bottom line for sure. Alright. So moving on, when we talk about like disruptors, that’s always something fun to talk about. Yeah, I mean, uh, kind of going back to everything we’ve talked about leading up to this, right?
Andrew: 30:35 Just having, if you can be first in the market, sometimes that’s enough to be the best and be the one that kinda sticks. Go back to Apple and Apple’s ipod. Maybe it wasn’t the first, um, but it wasn’t the first MP three player that, that kind of combined a couple of technologies to be like the most cutting edge, but they were continuously innovating on their products you want from the Ipod to the iphone and from the Mac to the Mac book, uh, from the iphone to the IPAD. So you know, when you’re able to continually innovate like that, you are going to have better products and that’s going to create more cash flows. And when you become a company like apple, you’ll get to a point where you have trillions of dollars overseas, uh, because you just can’t stop making money. So with a company like apple, they, in order to make innovation, you’ve got to spend on r and d and where the spending on r and d work in that come from that can come from your earnings and from reinvesting those earnings.
Andrew: 31:48 If you’re looking from an accounting standpoint, that’s called A. Sorry. No, nevermind. Sorry, can you edit that part? I sure. Again. Okay. So when you have a company that’s, that has great earnings, are able to reinvest that and spend on research and development than those, you know, the more you spend on that, the more likely you are to to come up with some of these innovative products. So I think that can be a great moment. No, when you have a company that’s dedicated to doing that and they might not get the best product every single time, but if they’ve shown a commitment and they’ve shown a track record and a history and there’s similar management, or the same management team that’s been to do that, then that can be competitive mode, especially for some of the latest and greatest industries and companies and business models that can really be a great driver for competitive advantages and superior products.
Dave: 32:55 I agree. And another company that’s springs to mind when I think about it is Amazon, they are not necessarily in a disruptor in the innovation aspect of it, but in the acquisition and conquering of other areas of the business world, that is definitely where they come into the disruptor realm. You think about the fear that kind of grip the market a few years ago when they purchased whole foods and the reaction to that purchase in the grocery store realm sent shockwaves through there, you know, some of the huge supermarkets like, um, oh gosh, a Kroger, a springs to mine, some of the big companies like that. There was a lot of fear in, in the market and how much that was going to affect it hasn’t seemed to have played out quite as much as they thought it was going to initially, but they have proven through the years that they are not afraid to take on any sort of retail world and stick their nose in there and see what kind of things they could do to gain a foothold and become the competitor.
Dave: 34:12 You think about the online world. They started off as a bookseller and now they’re the greatest online sales force there is out there at Walmart has had to fight mightily to compete with that and a lot of brick and mortar. You think about the effect it’s had, you know, through the years and malls and retail and just in general, it’s become, you know, kind of a dinosaur and that is really all because of what Amazon has been able to do with the Internet and their online marketing and sales. It is created a beast to that has changed how we buy things around the world and that’s a fascinating study and a fascinating to me, a illustration of how they’ve been a disruptor and they’ve started to go into healthcare. They’ve, you know, looked into becoming a pharmaceutical company and a wine distributor. I just, you know, anything you can think of and they’re just not afraid to stick their nose in there. I think to me that’s a great example of a disruptor. Yeah, a hundred percent agree. All right, so let’s move on from kind of talking about some of the features of most. Let’s talk a little bit about how to not use them when you’re making investment decisions or to how to truly find, you know, a competitive mode.
Andrew: 35:39 Yeah. So I saw this article this morning and I show that to you. Basically it was a article that said Netflix is pricing power means that this stock is not overvalued. So based on a fin visit, price to earnings ratio in that flux today. Uh, I see a lot of overvalued metrics just in general. So there are price earnings is 1:45 even on a pe basis. Is that like a 79? The price to sales is other than the price of books and the 33 a really, really priced for huge success, right? Really, really highly overvalued by almost any metric you can possibly unreasonably talk about. So in this article is by intrinsic investing. Um, they said that if you take Netflix, is pricing power into consideration that the, based on the adjusted eps earnings per share and adjusting the pe, uh, that the pe is actually much lower than what they currently are at.
Andrew: 36:52 So as an example, Netflix charges nine 99 right now for a subscription. They were saying, Netflix does have the pricing power and if they were to capitalize on that pricing power, they could raise it up to like if it was up to $15, they would see their pe drop to 26 point three. If they raise the subscription price from 99 to $20, then their pe as it stands today, would actually be 13 point nine, which arguably does look undervalued. However, I think you can get into a lot of trouble if you start to adjust valuation models based on how you perceive a competitive moat. I think that’s kind of putting the cart before the horse when you start to make such rosy predictions, predictions and projections that now we’re, we’re trying to change reality in order to fit this narrative where we need to be looking at competitive moats objectively. Is it true that they have pricing power? I think it is true though, are the Cole talked about how they’ve successfully,
Andrew: 38:05 We’re able to raise the price several times from, I think it was six 99, seven 99 to nine 99. Yes, they have pricing power. Will that pricing power continue? That’s debatable. and can you adjust your valuation based on how you perceive their pricing power? I think that’s where you can really get into trouble because I think a competitive mode should be a feature of a stock, but it shouldn’t be the reason you’re buying the stock. You always need to remember about valuation and remember that there’s a reality to what were the businesses. Now obviously there’s a feature component to buying stocks and that’s what makes buying stocks so tricky. However, if, if it truly is a competitive moat, you should be able to see its impacts today and for the future. And I don’t think it’s smart wise or even fair to be playing with the financials and making these absurd projections to make a current price that’s, that’s obviously overvalued. To try the kind of excuse that, try to make exceptions to the rule. I think that’s, that’s a big trap. And the big mistake you can make is when you look at a reality of a stock and what the financials are telling you, and then suddenly you’re, you’re, you’re twisting those numbers around just because it’s, you don’t like what the numbers are telling you. I think if you’re going to invest based on pe, invest based on pe and don’t do it by, by adjusting things and, making projections on how you think their competitive mode should play out.
Dave: 39:51 I would 100 percent agree with that. I think one of the things that would scare me about doing that as you’re now projecting into the future as if you have a crystal ball and you know what’s going to happen. And I guess to play devil’s advocate, I would argue that they don’t have the pricing power to almost double what they’re charging people. Now. Uh, I, as a Netflix subscriber, I don’t know if I would pay 20 bucks a month to have what I have now. I don’t think it’s worth that. And you also have to take into consideration it’s not, it’s not operating in a vacuum. There is a huge amount of competition with this area of business. You think about the quote-unquote cable cutters of which I am a member of. There are people out there, a lot of people and it’s a growing, growing number of people that are going away from cable and growing towards subscription-based television viewing and you know, as a person who has, has cut the cable and doesn’t watch tv in that way anymore. You know, I’ve gone the route of using Netflix, Hulu and Youtube TV and that’s how I watch are. That’s how our family consumes this stuff and
Dave: 41:21 I go back and forth on whether I want to have youtube or I’m sorry Netflix or who. And between those two there’s a huge competition about kind of how they’re placing themselves in the market. And you know, we’ve talked a little bit off air about what’s the impact it’s going to have when Disney gets into the world of this and they put their foot in and what the success that they’ve had with everything else that they’ve touched. Who’s to say that they can’t become the great disruptor in this market? And you know, that’s not that far off, that they’re going to start doing this and it’s going to have a huge impact on Netflix and Netflix has started down the path of creating their own content because of the expense that they’ve had to generate of buying all this other content that they’re using. So they’ve actually found it more competitive for themselves to try to create their own content because it’s actually cheaper for them to do so.
Dave: 42:25 And you know, these guys were talking about the pe and, and this, that and everything. But the company has been operating, you know, close to the very close to the neck of whether they’re profitable or not profitable company for a very long time. And that’s being generous. Yeah. You know, it’s, it is. And you know, you think about the earnings that they’ve actually been able to generate versus you know, what the stock has, you know, you know what you’re paying for it. It’s, it’s kind of obscene. You would never ever in a million years go to a car dealership and buy a car for 142 times what it’s worth. You just wouldn’t. So I guess for them to project that into the future is, uh, it’s, it’s, you used the word absurd. I think that’s probably a really good word for it and it would make me very leery.
Dave: 43:18 I’m not trying to bash these guys, but I don’t agree with their theory on this. I just don’t think that that’s a logical way to look at investing in a company by projecting what you think that this company’s pricing power could or could not do in the future. And I would do the same thing if I was, if I was trying to invest in Apple, I’m not going to project with our pe is going to be based on what I think are going to be able to sell their iphone four in five, 10 years from now. Who knows what’s going to come along and those five, 10 years that’s going to maybe take apple down. You just never know. I mean there’s so much competition out there and what’s the greatest way to create competition is by having a company as successful. Then if everybody’s going to want to get in on that because they could see that they’re making money for it and the kind of the same rule applies with Netflix and I think that’s one of the reasons why, you know, I think that their theory and their reasoning is faulty because I argue that they don’t have pricing power.
Dave: 44:18 It’s such a competitive business and they are not the innovator or a leader. They were at one time but people have caught up and if caught up very quickly and Amazon has gotten into this as well as his apple, you know, everybody’s in the race to try to create their own content and try to create this business and they’ve done it because Netflix was successful and they were doing great things. They were a disrupter, but I think that time has come and gone and I just don’t think that this is a sustainable model for them to raise it to $20 a month for subscription so that they can get their pe down to $13 or 13. It was just I, I just don’t agree with that.
Andrew: 45:05 Guess who just became a majority shareholder by acquiring fox? A majority shareholder of Hulu. Oh yeah, yeah, yeah. It’s Disney. I’ve mentioned a couple of weeks ago how they’re pulling out of the whole network thing. The contract with Netflix, right. They won’t be putting their content on there and Amazon’s is pretty decent to uh, you know, that you could do the video stuff just from being the prime subscribers. So I liked that because you can download and I’ve been using that one. I’m on the plane. Yeah, I think that’s cool. I mean they don’t have as much content now. It’s not as good. It’s Kinda like these weird, uh, like some like offshoot Harrison Ford movie is on there. I was like, yeah, this isn’t bad. Right.
Andrew: 45:52 It’s probably only going to get the eye and there’s a, there’s so many options out there now. So it just, I just think that that is maybe kind of a pie in the sky, you know, super optimistic way of looking at something like that. And that’s the danger, like Andrew said, of projecting, you know, kind of the rosy picture down the road of what a company could do with our pricing power as opposed to just basing it on the actual now facts of what you think the company could do right now as opposed to what they could do a 10 years. That’s, you know, that’s a really, really hard place to be as an investor.
Andrew: 46:30 And you mentioned, you know, being overpriced by 140 percent per hundred, 40 times. Like you could easily find a company that’s a fifth is expensive and you could argue that has similar pricing power in their industry. You wouldn’t have to pay nearly as much.
Andrew: 46:48 Right? Exactly. Well, yeah. A perfect example of the illustrate this point that we’re talking about. If you go back 20, 30 years, sears was the king in the retail world and you know, this week they announced they’re going bankrupt. So the business changes. Everything changes. It’s always moving. It’s always, there’s always gonna be somebody coming up trying to take a piece of the Pie and if the company doesn’t stay relevant and do change and do the things they need to do, they go the way of the dinosaur.
Andrew: 47:19 So I think that’s stuff to be careful of. I think it’s exciting to talk about competitive moats. It’s obviously been a major feature of Warren Buffet’s investments and what’s him so successful and it can be some great characteristics to find and to give yourself success in the stock market as well. However, you also need to be careful, make sure you’re not forgetting about valuation and you’re not doing the absurd things evaluation. I think another key point with all of buffet’s a stock buys, even with the one where people were saying, wow, he moved away from value investing that and he bought coke at a much higher evaluation than, than he was normally buying businesses back then. Uh, but even then it was still on the other metrics. It was still reasonably valued if not undervalued. So even though a company that has competitive modes to make sure first and foremost you’re getting the margin of safety on these, that means you know how much the price is, you know, what their financials are, you know, what price you’re paying in relation to those financials and then consider like a competitive mo as something that maybe separates first place and second place or something that’s kind of like icing on the cake. I think if you can find businesses that are trading at a discount to their insurance value trading at great prices, I think you can select from those, from those overloads in this feature or that feature and that can really lead to some great longterm success and can help you make what’s this product line look like?
Dave: 48:56 Well, you know, uh, just based on my own observations and experiences, I really think that this brand strong or this product is strong and I compare it over here to this stock, which is also kind of trading around the same type of evaluations. But this looks really commodity to me. That doesn’t look like it has any sort of the mo other than the fact that it’s just there and producing a product that can help you make some tough decisions and if you can load your portfolio up with a lot of these, uh, competitive modes, you might find a various businesses are able to grow them and grow them and then it might snowball into a great company like an apple or Disney or any one of those companies we’ve talked about today that have these strong competitive moats. So I think something to be aware of, something to look for, but also at the same time, something not to overvalue and something not to put too much emphasis on making sure you have everything else taken care of first.
Dave: 49:52 All right, folks, will. That is going to wrap up our conversation on competitive moats. I hope you enjoyed our discussion and found a finger or two in there that will help you with your investing. So without any further ado, you guys go out there and have a great week. Invest with a margin of safety. Emphasis on the safety, and we’ll talk to you guys next week.
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