One of the best things about raising kids is watching them learn.

Our three-year-old, for instance, recently entered the “Why?” phase, leaving Mom and Dad scrambling to answer heavy questions like, “Why is there a universe?” and “Why are there earthquakes?”

Thankfully, our five-month-old still has a few years before she peppers Mom and Dad with existential questions. Among the first skills that she’ll learn is sorting objects by colors and shapes. Learning to group objects is an essential skill to develop. In a primal sense, classifying allowed our distant ancestors on the plains to promptly assess threats (a big animal) from non-threats (a tree).

A recent paper by Blue Mountain Capital Management’s Michael Mauboussin explored how the investment world makes comparisons. More specifically, Mauboussin shows how our field frequently does a poor job comparing companies. He concludes that:

“Comparing, essential to effective decision making, comes naturally to humans. But our basic approach of relying on analogy can limit our ability to compare effectively. In particular, we fail to incorporate sufficient breadth and depth into our comparisons, and we can be easily swayed by the presentation of information or the allocation of our attention.”

We believe there are opportunities to capitalize on these bad habits by seeking idiosyncratic companies. These are companies that we think are difficult to classify because they have a differentiated business model.

Tangerines among oranges

Most sell-side research shops use the Global Industry Classification System (GICS) to organize their analyst staff. For example, analysts are typically placed into sector-based teams (e.g., energy, consumer staples, healthcare, etc.). Each team is divided further into industries (e.g., energy equipment, beverages, healthcare technology, etc.) for which an analyst or a group of analysts is responsible.

Let’s say you’re the beverages analyst. Your job is to provide clients with deep research and actionable ideas among a specific group of brewers, soft drinks, and distillery companies.

Not only are you incentivized to be laser-focused in this niche, but a sell-side analyst with only “hold” recommendations is of little value to clients. As a consequence relative valuation techniques – i.e., comparing multiples – reign supreme in determining price targets. It makes sense. You’re intimately familiar with the companies you’re comparing and, regardless of market trends, you’ll always have names that are relatively under- or over-valued.

Relative valuation works fine for the analyst and his or her clients when the compared stocks have similar fundamental characteristics. There are circumstances, however, where a stock on an analyst’s coverage list has unique fundamental characteristics and may thus be misunderstood.

Square peg, round hole

We’ve found that First Republic Bank to be a case in point. The regional banking industry is broadly commoditized, making relative valuation a fair way to assess value among regional banks.

However, we believe that First Republic’s fundamental characteristics are different from its GICS-assigned peer group. To illustrate, First Republic’s Net Promoter Score is miles ahead of the U.S. banking industry and more in line with retail businesses with highly-regarded customer service.

Source: First Republic investor presentation

Put simply, we think First Republic is playing a different game than its banking peers. As a result, judging it against banks alone is a mistake.

Going back to late January 2011, for instance, the average percentage of “buy” ratings on First Republic is just 44.9%, according to Bloomberg, despite the fact the stock price has more than tripled over that period. Instead, “hold” ratings dominated analyst opinion for most of the last seven years. This suggests that the covering analysts likely struggled to assess First Republic’s value on a regular basis.

Consider these November 2011 statements from a well-regarded sell-side research shop: “We are impressed by the uniqueness and simplicity of the First Republic business model. Its focus on customer service goes above and beyond that offered by any other bank…What holds us back from taking a more constructive view is relative valuation.”

In other words, the analyst recognized First Republic’s unique franchise, but still valued First Republic solely against other banks. When the report was released, First Republic traded at $26.52 (dividend adjusted). It recently traded near $91.

Granted, the banking regulations by which First Republic must abide will never make it entirely comparable with customer-friendly retail or hotel franchises, either. As such, it’s reasonable to compare First Republic against other high-quality banks, but it shouldn’t be the only approach used.

Bottom line

At Ensemble, we are drawn to businesses that aren’t easily categorized. Differentiated business models can not only be a source of competitive advantage, but can also present value opportunities. Because analysts and investors have a natural tendency to classify – and subsequently cling to that classification – there’s a good chance that firms with idiosyncratic business models will be misunderstood and therefore mispriced.

Clients, employees, and/or principals of Ensemble Capital own shares of First Republic Bank (FRC).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by an employee, principal and/or client of Ensemble Capital you will find a disclosure regarding the security held above. Should an employee, principal and/or client of Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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“Rule #1: Never lose money. Rule #2: Never forget rule #1.” -Warren Buffett

Warren Buffett’s “Rule #1 and #2” hold special appeal to many investors. They seem to sum up so much good advice in just 11 words. And from a philosophical standpoint they do. But from a practical sense they can cause investors to set such a high bar for making investments that they are unable to fully invest their savings and end up not reaching their financial goals.

What Buffett’s rules help with is avoiding “sins of commission”. These are the mistakes we make when we take an action that goes wrong. Buying a stock that loses money is a sin of commission. Outside of investing, asking someone on a date who says no and leads you to be embarrassed is a sin of commission.

But “sins of omission” can be just as painful. Not investing in a great stock because it wasn’t perfect or because you were too busy learning every last detail of the stocks you already owned to find time to work on new ideas are sins of omission. So is not getting up the nerve to ask that attractive someone out on a date.

There is a sort of wicked tension between avoiding sins of commission and sins of omission when it comes to investing. Every smart and successful investor wishes they knew just a little bit more about the companies in their portfolio. On the other hand every smart and successful investor works hard to allocate more time to researching new ideas.

The problem with Buffett’s advice is that it ignores this tension and focuses investors exclusively on avoiding sins of commission.

In a recent post, Ben Carlson looked at how investors who stayed out of the market in the wake of the financial crisis now must achieve massive gains just to get back to zero. For all the times that you’ve heard about how you need to double your money to get back to even if you take a 50% losses, no one ever talks about the reverse. Similarly, in this 2014 presentation Robert Vinall looks at the dangers of Sins of Omission.

But Warren Buffett is a funny guy. While he’s a fountain of wisdom, many of his quotes are contradictory. While his “Rule #1 and #2” quote is one of his most famous, here is Buffett talking about his biggest mistakes at the 2004 Berkshire Hathaway shareholder meeting (according to notes taken by Whitney Tilson):

“The main mistakes we’ve made – some of them big time – are: 1) Ones when we didn’t invest at all, even when we understood it was cheap; and 2) Starting in on an investment and not maximizing it… We’re more likely to make mistakes of omission, not commission.”

So Rule #1 is “don’t make sins of commission” and yet Buffett admits it is sins of omission that have been his biggest mistakes. How do we reconcile this contradiction?

Warren Buffett is way to complex and sophisticated of a thinker to be summed up in a sound bite. But that’s what people have done with the Rule #1 and #2 quote. Life would be so easy if we could act on the basis of simplistic soundbites. But life, and investing, is far more complex. Yes, when investing we should always seek to protect our capital and be sure to focus on downside risks as much as upside potential. But also, we should recognize that not investing can be just as big of a mistake as making a bad investment. The issue for investors is not to try to avoid any and all mistakes. The goal is to compound your capital as much as possible over the long-term. Doing this well requires taking risks that might cause you to lose money, in direct violation of Buffett’s Rules. But it also requires protecting your capital and paying attention to the risk of loss as much as you pay attention to the opportunity for gains.

It is where Never Lose Money meets Mistakes of Omission that we find the interesting frictions and incongruities that lay at the center of successful investing.

The soundbite of the Rule #1 quote is, quite literally, a danger to reaching your long term investment goals. But in practice, Buffett has figured out how to reconcile the two opposing concepts of not losing money while also not being too afraid to act even in the face of uncertainty. It is this ability to reconcile opposing ideas that stands at the center of Buffett’s brilliance.

“The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” -F. Scott Fitzgerald

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by an employee, principal and/or client of Ensemble Capital you will find a disclosure regarding the security held above. Should an employee, principal and/or client of Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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In investing, knowing what you don’t want to own is just as important as knowing what you do want to own.

For us at Ensemble, firms that consistently generate low returns on invested capital (ROIC), have no discernable economic moat, or have a shaky balance sheet are quickly ruled out from consideration.

What’s more challenging is deciding between good and great businesses. In addition to current portfolio holdings, we’re continuously vetting businesses for potential inclusion in our portfolio. Most of these are already good companies, but they still may not pass all of our tests.

To illustrate, the types of questions we want to answer before committing your capital are:

  • Does this company have an economic moat?Are its competitive advantages durable and likely to result in high returns on invested capital for a decade or more?
  • Is the economic moat widening or narrowing? Is it getting easier or harder to compete with the company?
  • What are the secular trends that could help or hurt the business? There were probably some well-run horse carriage manufacturers in the early 20th century, but their relevance was cut short by technological change.

Today, I’d like to walk you through an example of a good company we recently researched but decided not to pursue as an investment.

Diminished wide moat

The company is Ecolab, a $40 billion specialty chemicals firm best-known for its legacy cleaning and sanitation offerings. Ecolab’s legacy business operates with a “razor-and-blade” model: it rents cleaning equipment to customers like hotels, restaurants, and long-term care facilities and then sells the proprietary chemicals used in the equipment. This brilliant model produces high levels of recurring revenue and cash flows that have supported 26 consecutive years of dividend increases.

In 2011 and 2012, however, Ecolab made two transformative acquisitions that impacted its moat – negatively in our opinion. The first was Nalco Holding, a water treatment business serving the mining, energy, and paper industries. The second was Champion Technologies, a specialty chemicals company that produces water treatment for oil drillers and products that prevent oilfield equipment corrosion. I’ll address these acquisitions in a moment, but want to start with the legacy cleaning business, now primarily housed in the Institutional segment.

The golden goose

Integral to Ecolab’s moat in the Institutional segment is its direct sales force that provides customers with “high touch” relationships. Not only are these relationships hard to replicate, but no competitor is remotely close to matching Ecolab’s 26,000-plus salesforce. Ecolab estimates this figure is two-to-five times larger than any competitor’s.

The Ecolab salesperson will pitch the customer on how Ecolab’s solutions will help them save money on chemical, water, and energy use over time. The long-term savings is a critical selling point as Ecolab’s products are more expensive. As we’ll see in a moment, this factor might limit Ecolab’s growth.

Once Ecolab is in the door, it becomes much easier for the salesperson to cross-sell additional Ecolab products. The company has a robust research and development budget that drives innovation to support the salesperson’s efforts to “Circle the Customer.” The more products and services Ecolab can place at its customers’ facilities, the stronger its switching cost advantage becomes.

Institutional’s core customers include Fortune 500 foodservice, healthcare, and lodging firms, as well as universities and government agencies. The reputational cost of infections, foodborne illnesses, and unsanitary conditions at large institutions is a positive secular trend for Ecolab.

 

Source: Ecolab 2017 Investor Presentation

Finally, Ecolab benefitted mightily over the last 10-20 years from inept competition. Its main competitor for North America institutional cleaning business is Diversey, which was most recently sold to Bain Capital in 2017 by Sealed Air. This was the FIFTH TIME DIVERSEY HAD BEEN SOLD in the previous 21 years.

As a consequence of being passed around like a hot potato for two decades, Diversey’s strategy was inconsistent. Ecolab capitalized on many of Diversey’s mistakes.

Big fish in a small(er) pond

At first glance, Ecolab’s Institutional segment looks good. We did have some concerns, however.

Ecolab’s presentations imply that, while they have the biggest market share in the institutional cleaning industry, it remains a small slice of the overall pie. One might think that data point implies a long growth runway, but it doesn’t tell the whole story.

Source: Ecolab 2017 Investor Presentation

Ecolab Institutional’s value proposition is most attractive to the national and regional restaurant and hotel chains. In the U.S., ABOUT 52% of restaurants are chains, as are TWO-THIRDS of available hotel rooms. Ecolab has already done quite well in this segment.

Larger customers like that Ecolab can be a one-stop shop and provide a consistent experience across geographies. They’re also more receptive to Ecolab’s multi-year expense saving pitch. An independently-managed single-unit restaurant, on the other hand, tends to run on razor-thin margins. They’re more concerned with saving money right now.

Even though Ecolab’s stated market share is 12%, we think the share of their core addressable market is much higher. As such, we see the Institutional segment as having more of a legacy moat than a reinvestment moat. In other words, it has limited ability to reinvest cash flows into Institutional at attractive ROIC levels.

We also had concerns about S.C. Johnson re-entering the institutional cleaning business, Bain Capital’s push into the European hygiene market, and potential impacts from food service automation.

Each of these factors gave us pause and led us to believe Ecolab’s Institutional moat, while wide today, will likely narrow in the next decade. Even if Ecolab holds onto existing Institutional customers, competition for new customers should intensify. The result could be lower margins and ROIC for the segment.

Poor capital allocation

We further concluded that the acquisitions of Nalco and Champion diluted Ecolab’s overall moat by diminishing the impact of the wide-moat Institutional operations. Indeed, we think the two deals were motivated by growth rather than by ROIC. If that’s the case, it would support our thesis that the Institutional business is a legacy moat with slower growth potential. Otherwise, we would have expected management to reinvest capital that was used in M&A back into the cleaning business.

Before Ecolab’s acquisition in 2011, Nalco’s ROIC was volatile and mediocre. Nalco’s 3D TRASAR system and its embedded engineers at customer sites may provide some switching cost advantages; however, Nalco’s historical ROICs do not clearly reflect these advantages.

Compared to ECL’s pre-acquisition ROIC, you can see some clear differences in the two operations. Nalco’s ROIC was cyclical and likely hovering around its cost of capital. Conversely, Ecolab’s showed steady ROIC well above its cost of capital, even through the financial crisis.

2006 2007 2008 2009 2010
Ecolab 15.98% 17.66% 18.79% 16.70% 19.15%
Nalco 6.81% 7.33% 4.96% 6.87% 11.23%

Source: Bloomberg

And while the decline in energy prices in recent years is partly to blame, Ecolab’s ROIC has yet to recover pre-acquisition levels. We expected to see more improvement given reported synergies from the deals.


Source: Bloomberg

Bottom line

Ecolab is a good company, but it fell short of our definition of a great company. To be sure, Ecolab’s stock price has outperformed the S&P 500 since the end of 2010, so management deserves credit for integration efforts and navigating through tricky commodity and energy markets. That said, our concerns about its moat trend relative to its premium valuation – 30x trailing P/E and 2.8% free cash flow yield – and management’s questionable acquisitions drove our decision to cease further research.

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by an employee, principal and/or client of Ensemble Capital you will find a disclosure regarding the security held above. Should an employee, principal and/or client of Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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Weekend Reading

20 January 2018 | by Paul Perrino, CFA®

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Facebook, Alphabet shifted in sector classification system (Noel Randewich, @randewich, Reuters)

It seemed like any company using technology to deliver a service was lumped into the Technology sector. The Global Industry Classification Standard (GICS) is trying to catch up to the times. They’re renaming the Telecommunications sector to Communication Services. A number of companies will be moving out of the Technology sector and into this new Communication Services sector, such as Facebook and Twitter. Disney and DISH will be moving from the Consumer Discretionary sector to the new Communication Services sector.

The Difficulties With Facebook’s News Feed Overhaul (Farhad Manjoo, @fmanjoo, NYT)

Over the past few years research has been popping up about the damage Facebook causes people and society. After the 2016 Presidential election a number of critics blamed Facebook of the spread of and profiting from fake news. On 1/11/18, Mark Zuckerberg announced a plan to revamp the News Feed to help address these issues.

Beyond the Bitcoin Bubble (Steven Johnson, @stevenbjohnson, NYT)

While the price of cryptocurrencies may be entertaining to watch, the underlying technology that’s driving it could be a technological leap forward. It also comes at a time when a number of critics are saying that the quality of the internet has eroded and needs fixing. Some think blockchain can be the solution. The author does an excellent job of making cyrtocurrencies understandable and wrestles with the cognitive dissonance of the parabolic rise in the price of cryptocurrencies while also recognizing the potential revolutionary nature of the technology.

Fiat Chrysler’s Marchionne: The Future of Cars Will Be Electric and Commoditized (Tommaso Ebhardt, @TEbhardt, Bloomberg)

The development of artificial intelligence and electric motors (and storage) have been disrupting the research department in the auto industry for the past few years. Auto companies not embracing this change could be in for a rude awakening. “Within a decade, he expects widespread adoption of cars at Level 4 autonomy, capable of driving without human intervention in restricted geographic areas. By 2025, he predicts that fewer than half the cars sold will be be fully combustion-powered.”

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by an employee, principal and/or client of Ensemble Capital you will find a disclosure regarding the security held above. Should an employee, principal and/or client of Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.” – Intel co-founder, Andy Grove

There’s a lot to like about economic moats. By keeping competition at bay, moats allow businesses to sustainably produce returns on invested capital (ROIC) above their costs of capital. The result is economic value creation. As investors, firms that compound intrinsic value are attractive since they put time on our side.

But it’s essential that moat analysis continues beyond your initial investment. Indeed, wide moats, in particular, can make companies too comfortable and thus susceptible to upstart competition.

Consider the following passage from Jean-Denis G.G. Lepage’s book, Castles and Fortified Cities of Medieval Europe: An Illustrated History (my emphasis):

A wet moat, called a douve or wet ditch, formed a very efficient obstacle against the assaulting army. However, wet moats could be something of a mixed blessing; they were inconvenient in peacetime, which meant that unofficial bridges were often erected – with subsequent argument and indecision about the right moment to chop them down in an emergency. Besides, water might dangerously erode the base of the wall, and stagnant water might be a year ‘round health hazard for the inhabitants of the castle.

When things were going well, the moat-encircled defenders often let their guard down until it was too late. The simple existence of a water-filled moat could lead to pestilence or otherwise weaken the castle’s residents before the next attack.

Lulled to sleep

At the risk of over-extending the analogy, there are parallels with economic moats here. It can help explain how Dollar Shave Club snuck up on Procter & Gamble’s lucrative Gillette razor business, how Apple and Google unseated BlackBerry’s smartphone dominance, and how Netflix helped lead a cord-cutting movement much to the chagrin of cable companies.

Successful companies that aren’t vigilant or are afraid to disrupt themselves can quickly lose the next battle with competitors. As Andy Grove said in the above quote, “only the paranoid survive.”

And there’s never been a better time in the business world to be paranoid. Rapid innovation and cheap and abundant capital make moats more vulnerable.

  • Billion-dollar brands that once won consumer mindshare by having the most robust advertising budget now face upstart brands with vibrant low-cost social media followings.
  • Tech companies that built switching cost advantages using legacy systems now need to justify their typically-high prices against Software-as-a-Service (SaaS) alternatives.
  • Industrial distributors that relied on scale-driven cost advantages and sticky relationships are finding their customers more willing to shop and price-compare.

Investors should seek opportunities in which they believe future ROIC will be ahead of market expectations. As the market revises its ROIC expectations higher, it should lead to a rising stock price. Conversely, if ROIC erosion happens faster than the market expects, it will likely lead to a price drop. As such, it pays to make moat evaluation part of your regular investment process.

Process

So, how might we be more vigilant about moat vulnerability?

First, determine the company’s moat source.

If the moat source is…

beware of
Network effect Emerging distribution technology; Declining user engagement
Switching costs The arrival of cheaper alternatives with quality approaching that of the incumbent; Fading pricing power
Intangible assets An inability to create new brands, develop new patents, etc.; Product gaps in the company’s offerings
Cost advantages New technology that reduces costs industry-wide; Secular trends in underlying commodity prices
Efficient scale

The entry of irrational competitors; A change from a price-over-volume to a volume-over-price strategy

Second, consider management’s capital allocation decisions.

  • Is the company reinvesting enough capital in its best operations or is it irrationally milking them for cash flow?
  • Has recent M&A strengthened the moat or were there other motivations (e.g. growth-for-growth-sake, management’s ego, etc.) behind the deals?
  • Is management returning too much capital when it should be reinvesting to face new competitive threats?
  • Does management understand ROIC concepts and work to sustain/improve those metrics?
  • Has management shown a willingness to shed underperforming businesses and reallocate the capital to better opportunities?

Finally, study the company’s corporate culture.

  • How quickly can the organization adjust to change?
  • Are decisions made in a bureaucracy or are operations decentralized?
  • Does management have skin in the game or are they well-paid mercenaries?
  • Does the corporate culture directly support the moat (g. Starbucks’ “happy employees make happy customers”) or might the culture work against it?

One of the more difficult things to grasp about eroding moats is how quickly the process can occur. Moats that took decades to build can disappear in the matter of a few years – or less. As we’ve seen, once the market agrees a once-powerful company no longer has a moat, its premium valuation vanishes and investors who were slow to react pay the price.

Bottom line

By periodically reviewing a company’s economic moat, we acknowledge a key principle: Moats are not static. They are getting wider or narrower every day. In the hands of the wrong management team, they can even be a mixed blessing.

If we can identify an eroding moat early, we stand a better chance of exiting the investment with more capital to reallocate. Better still, we might avoid making an initial investment and putting your money at risk in the first place.

Clients, employees, and/or principals of Ensemble Capital own shares of Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL).

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by an employee, principal and/or client of Ensemble Capital you will find a disclosure regarding the security held above. Should an employee, principal and/or client of Ensemble Capital subsequently purchase or sell any position in a security discussed in this blog entry, we will not update the above disclosure nor revise any archived blog entry after the date it is originally posted. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument.

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