M.O.A.T. investing: a checklist

What boxes do we try to check off before selecting an investment?  M.O.A.T. is an acronym for:

(M)argin of safety

(O)wner-operators

(A)way from the crowd

(T)rends

Margin of safety addresses the question, “What if I’m wrong?”  This could be with regard to timing or even the business in general.  Does the business have a sustainable competitive advantage or “moat?”  This might show up in the form of high switching costs (e.g. enterprise software), brand reputation, economies of scale (e.g. Costco) or network effects (e.g. Facebook).  A strong balance sheet also provides a margin of safety.  This is especially important where there is high risk of changing fashions, technological obsolescence, or volatile commodity prices. 

Finally, valuation matters.  The price you pay will determine your overall return, but not nearly as much as choosing a high-quality business.

Investing alongside owner-operators is based on the principle that incentives matter.  These are typically entrepreneurial founders with “skin in the game.”  Their interests are aligned with ours, with an eye towards building wealth slowly and over the long-term.  These are not quick buck artists looking to flip companies.  They’re in it for the long haul, and in many cases looking to build an asset for the next generation.

Another group with skin in the game: concentrated investors.  Not only do they seek similar companies and hold them for long periods, but they usually have considerable personal wealth at stake.

There is a growing fad among portfolio managers towards catering to so-called “stakeholders.”  These are non-shareholders without any skin in the game – a classic red flag.

Investing, like most of life’s endeavors, is an exercise where it pays to stay away from the crowd.  Consider a party.  In the beginning, you can move around and everyone is having a good time.  Then it starts getting crowded and out of hand, attracting some bad characters.  Before you know it, the music is deafening, furniture is breaking and some people are taking illicit drugs. That’s the time to leave… before the police show up. 

Sometimes it pays to go against the crowd. With secular trends, it helps to get ahead of the crowd. But joining a crowd is almost always a recipe for disaster.

That brings us to our final box, trends. Excuse the cutesy expression, but “trends are your friends.”  Get these right and you’ll have the investment winds at your back.  Fight them and you’ll be constantly swimming against the current and straining to make much progress.

There are positive trends, e.g. the digital revolution and genomics revolution, as well as negative trends such as the growth of government and cultural Marxism.  Demographic trends tend to be baked in the cake.  For example, the over-65 demographic will be the fastest growing over the next 30 years, not just in the U.S., but around the world.

“We look at every company with a microscope, and then we look at them with a telescope.”

— Mario Gabelli