Getting inside a moat is now much cheaper for Indian investors. This is an opportunity that doesn’t come often and investors should make use of this opportunity before it gets whittled away by surging markets.
First, let me recap this business of moat. Back in July, as part of Wealth Insight’s fifth anniversary issue, our analyst team had done a ground-breaking set of articles on companies with deep moats. The idea of a moat is simple. Analysing a business can sound like it’s very complex. However, the bottom-line is that any business becomes a good investment if its customers will prefer its products and services rather than those of competitors, and will be willing to pay a good price for it. That’s what competitive advantage is.
If there’s a set of circumstances that makes it relatively easy for a business to maintain its competitive advantage, then that’s a moat. Just like a physical moat is a barrier that used to protect a fort from attackers in olden times, a competitive moat protects a company’s stream of profits and growth.
However, just having a moat is of no use to us as stock investors. Even a well-bemoated company won’t be a good investment if you buy it at a price that is unjustifiably high. In practice, it’s hard to keep a good moat secret. Inevitably, this means that stocks with deep moats are generally available only at high valuations. The stocks may be great, but it’s not easy to buy them at a price where you can make money.
In July, we had analysed scores of companies and come up with a list of 13 which had deep moats. However, at the time, the strength of the advice we gave to you was heavily constrained by the prices and the valuations at which many of these stocks were available. For many of the stocks, our analysts ended up saying that this is a great stock with a deep moat but it may be too expensive right now. The advice was to keep watching the stocks till the valuations may become reasonable.
Well, I’m happy to say that that time of reasonable valuations has now arrived. I’m sure that many of you won’t like me using the word ‘happy’ for what investors have gone through in the last few months. But then, we have to start thinking like value investors. The key to long-term happiness as an equity investor is not to keep wishing that the market keeps rising, but to see the poorer periods as opportunities for buying into deep moat companies at reasonably low prices.
Look at the legendary investor Warren Buffet. When the investing world was running terrified in 2008-2009, this disciple of value investing guru Benjamin Graham was hunting for value-priced acquisitions. This included an investment of 5 billion dollars in Goldman Sachs at the height of the crisis, as well as his biggest investment, 44 billion dollars in the railway company BNSF. These are companies with deep moats—competitive advantages that cannot be replicated at any reasonable time or cost.
In the current issue of Wealth Insight, we revisited the 13 companies we had identified as deep-moat businesses in July. Their moats are as deep as they were, but obviously their valuations are not the same. We’ve identified eight which are now at a point when it definitely makes sense to invest in them. Turn to page 32 and read our cover story and analysis of eight of these deep-moat stocks. You are unlikely to be disappointed with your investments in these stocks.
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