Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

by Michael J. Mauboussin, Dan Callahan

Measuring the Moat: Assessing the Magnitude and Sustainability of Value Creation

Sustainable value creation is of prime interest to investors who seek to anticipate expectations revisions.
This report develops a systematic framework to determine the size of a company’s moat.
We cover industry analysis, firm-specific analysis, and firm interaction.

Genres: Business, Finance, Entrepreneurship

73 pages, Unknown Binding

Published January 1, 2016

About the author

Michael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management. Prior to joining LMCM in 2004, Michael was a Managing Director and Chief U.S. Investment Strategist at Credit Suisse. Michael joined CS in 1992 as a packaged food industry analyst. He is a former president of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investors All-America Research Team and The Wall Street Journal All-Star survey in the food industry group.

Michael is the author of Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional PlacesUpdated and Expanded (New York: Columbia Business School Publishing, 2008). More Than You Know was named one of The 100 Best Business Books of All Time by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006). He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).

Michael has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. In 2009, Michael received the Deans Award for Teaching Excellence. BusinessWeeks Guide to the Best Business Schools (2001) highlighted Michael as one of the schools Outstanding Faculty, a distinction received by only seven professors.

Michael earned an A.B. from Georgetown University. He is also affiliated with the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory, and is on the board of directors of Sermo, an online community for physicians."

Reviews

[Isaac Chan · Rating 4 out of 5]

Very compelling and entertaining guide to strategic analysis, although I would comment that all this work might get too trapped in the weeds, and it gets too abstract to tie it back to the fundamental analysis process. Cuz what good is the strongest moat in the world, if it's already priced in? How many variables can a stock even price in at one given moment anyway? To me, at any given moment, only a few major factors drive markets via courtesy of animal spirits. Mauboussin obviously realizes this, and he feebly tries to pull back this analysis to ground, by chucking in forced sections on his Expectations Analysis and reminding the reader/ investor to consider the moat in the context of expectations. For that regard, I'd recommend readers to pair 'Measuring the Moat' with Mauboussin's book 'Expectations Investing', where the framework will start making sense.

Getting way too many Greenwald ideas from 'Competition Demystified' in Mauboussin's work. Homie just rehashes them unapologetically lol.

That being said, this paper really made me realize how naive my previous world-view was. It ain't all about nerding over your profession or obsessing over the product that really counts - but rather, businesses are a complex web of capitalism-induced fierce competitive dynamics that erode a business's moats constantly. Clever capital allocation and societal navigation is more important than just being a good worker or 'smart guy'.

One other thing I realized (Mauboussin includes various Buffett quotes) is how Buffett never seems to talk about whether the moats he analyses has already been priced in by the market. My only hypothesis is that, maybe he's just so good at this qualitative analysis, that everything he finds out about the company, ISN'T priced in. Tobias Carlisle was getting at the same vein too in Deep Value, that the vast majority of business regress to the mean due to competition eroding their moats (that's why growth investing sucks balls), but Buffett can somehow ingeniously identify the few with truly sustainable moats. Tobias could only attribute this to Buffett's qualitative genius.

If this is true, then maybe Buffett could be like the typical saying of how roided lifters shouldn't give lifting advice to natties. Buffett is on roids, he doesn't know how being natty is like, and he doesn't even know he's on roids. Maybe.

[Gennady · Rating 4 out of 5]

This is not a book. But rather a long research paper.