Originally posted by basant Originally posted by kannanravi1 have been trying to locate moat from financials (not just by understanding biz models) since I figured that if I could discover a financial method to identify moats, I would have a far more objective way. If I were to follow Concor's financials, the theme I can see there is very high double digit profit margins, very high return on equity and zero/low debt.  These three metrics, in my mind, show a sedate competitive environment. The moat is wide, fort is strong, and there are no enemies in sight!! A double digit margin shows low competitive pressure. High ROE shows that the business doesnt have to constantly add equity to survive. Low debt shows that there is no pressure to expand crazily by using dangerous levels of leverage.  All the above mentioned companies fit this from a financials standpoint. Locating moat from financials appears a much more objective way than evaluating business models. Thoughts from any one on this would be most appreciated.   Actually a very high RoCE over sustainable periods of time 5 years and above is the surest financial signal for a moat. The catch word is longer periods of time that is bvecause in the past 5 years all commodity stocks had a high ROE but that was more because of commodity prices going up then any other factor.   In this case if the forward or backwords linkeages in an industry is cyclical then it should be considered as a cyclical also.

Hi Basant sir,
      Makes sense. A high ROCE is definitely a sure sign. Even a high ROE can be obtained by piling up debt. But makes me wonder if profit margin is an even more important metric. Theoretically, a high profit margin shows low competitive pressure. But I guess a high profit margin also attracts new competitors. In that case, we should be looking at what keeps the company differentiated so that it can take on future competition. Eg: Most of the software outsourcers had excellent margins in the initial years. But since there was very little differentiation, they have now entered a phase or slow yet steady margin compressions. On the other hand a company like Sees candies commands good profit margins today and will probably continue to for ever.

Originally posted by manish_okhade If we follow Buffet then one thing is noticeable in his past company selections. Its less or more mostly in 3 segments - FMCG type (Coke, Gillete etc) , Banks and Insurance.  Rest could be Wallmart, Disney etc.   Does it mean all other segments lack moat? Or if we follow Buffet then we should simpley sit and watch for market to crash and then buy ITC, HUL, Dabur and alike? Its a proven technique indeed but will never work in Bull phase.

Hi Manish,
           Great observation. I think your observation of Buffett is very correct. And I think he does operate according to your inference of waiting until crash and buying majorely in bear market. Before this crash he had about 40B dollars in cash. Now I think he has invested about 30B of that in the last 3-4 months when market crashed!! But, he does selectively invest even in up markets. For example, he invested in a big way in construction materials maker USG at about $40 per share. Today the share is quoting at about $7 per share.  But he is still averaging down and buying at these levels. I have heard of another value investor, Seth Klarman follow a similar strategy. At the height of the bull market he held almost 70% of his family holidngs (he only invests for himself and his family, no fund business) in cash. Now he is almost fully into equities.
          Regarding moats, I would include power utilities also into Buffett's holdings. But you are right, his holdings are greatly skewed towards consumer monopolies and banks. Even his commodity plays, they are in a way solid consumer bets even though they don't fall neatly into the  definition of FMCG. Eg: USG is in a commodity business (construction materials), but they command a majority market share in US. Plus, they are the lowest cost producer. Another commodity play, POSCO, is a monopoly state-backed steel manufacturer in Korea. They are also supposedly one of the lowest costs producers of steel in the world (incidentally, pre Corus acquisition, Tata Steel was considered to be better than Posco). Also, his disastrous investment in US Airways also 'kind of' fitted this principle. US Airways had a major mind share in US until the industry started under cutting each other on prices. His disastrous investments in Dexter shoes and other shoe companies also was on the line that they had a good mindshare. But he underestimated the impact of low prices (imports from Asia) on customers' buying patterns in the fashion industry.
So what does this mean to me? In my mind, he doesn't seem to trust B-TO-B businesses. This is probably because B-to-B businesses have a lot more dynamics at play than just a good product and a good price. But end customers typically only care about a good product, good service, good price and they tend to retain that in memory - hence lending a great moat.  Another lesson for me is that, people typically shop around for products but dont as much with product dealing with security for their money (banks, insurance). Buffett and Munger have themselves said that they have been surprised at how banks require almost no moat to survive. I have also noticed this in US and in my home state Kerala, where almost any body with some spare cash launches a bank or an NBFC and lives 'happily ever after'!! Also, in India I think we can add some of the govt infrastructure monopolies to the 'moat list' (this is my personal opinion). Such entities did not exist in US when Buffett began his career. Infact, infra companies where into a price war and was bleeding. This is why he never touched railways in the past since private operators where fighting a bloody war. But now, after consolidation, there are only 2-3 large players in the freight railway field in US, which probably explains his sudden bullishness in this sector (he is piling up Burlington Northern Santa Fe). In India, some of the govt monopolies are so well entrenched that even a Mukesh Ambani has backed out after declaring war on some (Container Corp, GAIL).

Originally posted by manish_okhade Hi Kannan,   Thnx for good write up.   What i also feel that its bit diffcult to follow Buffet in India. Indian mkt has yet to mature in terms of product and services unlike USA. We have very few companies who have been in business for past half decade or more (if yes then they are mostly TATAs),. We still do not have Coke or MacDonald (read indian version).

Hi Manish,
   I feel the same about Indian markets. I read a list of Buffett investments and find it really hard to find similar companies in India.

"The existence of barriers to entry means that incumbent firms are able to do whatpotential rivals cannot. Being able to do what rivals cannot is the definition of competitive advantage. Thus, barriers to entry and incumbent competitive advantage are simply two ways of describing the same thing."
 Bruce Greenwald and Judd Kahn in their book Competition Demystified