Pat Dorsey is the guy who is at least partly responsible for democratising the use of Warren Buffett’s philosophy of moat in evaluating businesses. How, you may ask. He was instrumental in developing Morningstar’s economic moat ratings, as well as the methodology behind its framework for analysing competitive advantage. From 2000 to 2011, Dorsey was Director of Equity Research for Morningstar, where he led the growth of Morningstar’s equity research team from 20 to 90 analysts. Having authored two books — The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth, Dorsey now manages money as the founder of Dorsey Asset Management, based out of Chicago. Who better than him to ask the tough questions around moats?
Where do you think moats are becoming irrelevant or fast receding?
There are a couple of interesting areas to think about. What we are seeing in more developed economies is that the value of consumer brands is perhaps not as strong a moat as it once was. If you think about it, 20 years ago, if I wanted to reach 40 million buyers of breakfast cereal, I would need to buy advertisements on TV, and that was very expensive. So the barrier to entry to building a big consumer brand was very high. Today, I can spend a relatively small amount of money with targeted digital advertising on Google or Facebook and I can reach a very targeted group of consumers at a much lower cost. The ability to make people aware of your product is much cheaper, at least in Europe and the US, given the advent of digital media.
In the same vein, that breakfast-cereal company would need to have a massive factory, would need to have its own distribution network, all of which were very expensive. Today, if I find some consumers with targeted digital advertising that like my product, I can rent capacity at a factory and I can use fulfilment options from Amazon or others to deliver my product. A lot of former fixed costs have become variable costs, which reduces the barrier to entry. I think that the next 20 years is going to be difficult for a lot of big consumer brands. The brands are not going away, but their advantage is diminished relative to what it was, because it is easier for competitors to make consumers aware of their product as well as deliver them. So that scenar