Are There Too Many "Wide Moat" Investors?

This is an easy question to answer

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We had a fun time on this week’s Investing Power Hour podcast (links above) discussing whether we have entered “founder mode.” Give the Chit Chat Stocks podcast a follow if you haven’t already! It’s a good time and also informative (I hope).

Now, let’s discuss if we are fishing where the fish are.

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This was an interesting tweet:

This pretty much describes my strategy. I want a management team I can trust, a reasonable price, and a wide moat. Of course, I want these three criteria to be as high as possible for each company, but they are different weighing factors.

For example, if the moat and management team are meh but the stock is at 3x cash flow and returns cash to shareholders, that is a better opportunity than a 30x low-growth wide moat stock with best-in-class management. Price matters.

Like Yannis, I do get worried that the wide moat strategy is crowded. Are we in the nifty fifty era? Are “compounders” about to go through a bear market?

Perhaps. There are definitely some high-quality businesses I would be weary of buying today because they trade at 40x, 50x, or even 100x earnings.

(chart from our friends Finchat.io)

But just because some compounder stocks are overvalued today does not mean all of them are overvalued. You shouldn’t switch your entire strategy because Chipotle never trades below 40x earnings.

I would caution anyone trying to make a broad takeaway from the vibes you get from an online community like Twitter. On fintwit, you are curating your feed to like-minded individuals, and the algorithm reinforces things you are interested in. This is the well-known filter bubble phenomenon.

Don’t think anyone is interested in gold miners, deep value, or technical analysis? Pull up YouTube and do some exploring. I get constant ads from charlatans pumping their services on the channel. I’m sure a place like TikTok is similar.

There is also an easy way to answer the crowding-out question:

• Are you finding compelling opportunities with this strategy?

If yes, then there are still fish to catch. If not, then flow to another strategy for a while. It’s simple. This is what the greats do who we have studied on the podcast.

I think we have plenty of opportunities in compounder land, though. However, opportunities are not going to look like opportunities for everyone else. That’s what makes it an opportunity.

Phillip Morris traded at an EV/EBIT of 15 earlier this year and can easily grow EPS at a 10% annual rate this decade. As the price has risen, more people have come around to the story (as it goes). If it rises a bit more, I would say it is almost a consensus compounder. It was clearly not earlier this year.

Was that not an opportunity in high-quality land?

“Empty your mind, be formless. Shapeless, like water. If you put water into a cup, it becomes the cup. You put water into a bottle and it becomes the bottle. You put it in a teapot, it becomes the teapot. Now, water can flow or it can crash. Be water, my friend.”

- Bruce Lee

Bruce is saying you should go to where the investment opportunities are. I still see plenty of opportunities in high-quality land right now. So why should I change my strategy?

Brett

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