Brands might be losing moats
There is a school of thought which focuses on buying “moat companies” and holding them forever. This school of thought originates from an incomplete understanding of Warren Buffett’s value investing philosophy. Buffett has advocated buying “moat companies” or “great companies” at a “fair price” and holding them forever. Many of the companies which he has bought or has used as illustration of “moat companies” happen to have a strong brand. While many companies with strong brands do enjoy a moat, not all companies with brands have moats. Further, there are companies with moats which do not have strong consumer brands per se.
However, the misinterpretation of value investing is three-fold. First is that all companies with consumer brands have moats; second, buying these at “any price” is ok since Buffett mentioned “fair price”; and, third, one can buy and forget them, i.e. buy and hold forever. A fourth error is also, typically, found with this philosophy of holding a concentrated portfolio of 5-7 stocks.
Today, we just address the issue of brands and their moats.
Kraft-Heinz in its recent earnings took a $15.4 Billion asset impairment charges. These charges were related to its two main food brands, viz. “Kraft” and “Oscar Mayer”. One should keep in mind that both Kraft and Heinz are companies which are more than 100 years old and that food habits of human beings are the ones cultivated from childhood and the hardest to break. This would make long-lived food brands some of the strongest moats. However, this event clearly spells out that even some of the stronger brands might be weaker and the moats might be narrowing.
Half-Buffettologists, i.e. buyers of brands without paying attention to prices paid and holding them forever, are making a mistake if they are not aware of potential narrowing of moats even for the strongest of brands.
In the changing world we are in, it is important that everyone checks their portfolios and if they are composed of brands at crazy prices, then the investors should recheck and make sure that the brands are not threatened by future dynamics. Further, the prices paid for those and the current prices and valuations should be looked at carefully and this exercise should be carried out at least yearly if not quarterly while holding for the long-term. Finally, the portfolio should ideally have more than 20 stocks.
Past performance is not necessarily indicative of future results.