My Best Pick 2019

Moat busters

Moat-rich companies can quickly turn into allegory and here’s why it can all go wrong

Walter Bagehot, the legendary editor of The Economist, who commented extensively in the 19th century about government, economics and literature, wrote: ‘To illustrate a principle, you must exaggerate much and you must omit much.’

Even while not following Bagehot’s advice, charges of exaggeration will always be levelled on any forward-looking narrative not couched in probabilities, and sins of omission will be committed owing to limitations of word count. In an era of extreme climate, what can cause the water in a moat to evaporate? What are the functional equivalents of extreme climate for an investor? Here are the top four:

Oligopolistic markets and government regulations: Consolidation of firms is a powerful moat builder and subsequent ‘regulatory capture’ is an equally powerful moat widener. As Jonathan Tepper argues in The Myth of Capitalism, toll bridges have been erected in large parts of the US owing to growing consolidation across industries, leading to stronger pricing power. Numerous examples abound: the railroad industry has, over the past 30 years, shrunk from 30 players to the current Big Four, which are local and regional monopolies; the pesticide industry, where three companies, after the recent mergers, control 70% of the global market; the beer industry, where two companies have 90% market share and prices have gone up, but not owing to ‘premiumisation’ as investor presentations show; airline mergers have led to five large players, and the seat-belt sign has been switched off for industry profitability; the banking sector, where, since the previous financial crisis and with some government-directed mergers and reorg


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