Money and Finance
Here's a general criticism that I often hear about investing in companies with economic moats:
But here's the key thing to remember -- economic moats affect value in the long-term while the market's focus is on short-term results.
Why does this matter? Because if we're patient investors -- and if you're reading this blog, you're probably in this camp -- we only need to wait for the market to overreact to some short-term news (a bad quarter, etc.) that doesn't impact the company's competitive position and then look to capitalize on the opportunity. In other words, use the market's short-termism to our long-term advantage.
Opportunities to buy quality companies at good prices do present themselves over the course of the business cycle -- and purchasing premium companies at market average prices is a strategy I'll gladly endorse.
Best,
Todd
@toddwenning
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Money and Finance
Use the Market's Short-Termism to Your Advantage
Here's a general criticism that I often hear about investing in companies with economic moats:
Companies with economic moats always look expensive and they trade with premium multiples to the market. How can we invest with a suitable margin-of-safety and generate superior returns if we're consistently buying expensive stocks?It's a fair criticism. Indeed, companies that can consistently out-earn their costs of capital should trade with premium multiples and frequently do. In bull markets such as this one, quality doesn't come cheap and good moat-buying opportunities seem far and few between.
But here's the key thing to remember -- economic moats affect value in the long-term while the market's focus is on short-term results.
Why does this matter? Because if we're patient investors -- and if you're reading this blog, you're probably in this camp -- we only need to wait for the market to overreact to some short-term news (a bad quarter, etc.) that doesn't impact the company's competitive position and then look to capitalize on the opportunity. In other words, use the market's short-termism to our long-term advantage.
Opportunities to buy quality companies at good prices do present themselves over the course of the business cycle -- and purchasing premium companies at market average prices is a strategy I'll gladly endorse.
Best,
Todd
@toddwenning
- Buybacks Aren't Doing Much For Shareholders Right Now
"If everyone is doing (buybacks), there must be something wrong with them." - Henry Singleton, former Teledyne CEO (profiled in The Outsiders) With the exception of 2009, gross buybacks have outpaced dividends paid by U.S. companies each year since...
- Exploit Your Advantages As An Individual Investor
"Charles Ellis: Turning now to individual investors, do you think that they are at a disadvantage compared with the institutions, because of the latter's huge resources, superior facilities for obtaining information, etc.? Benjamin Graham: On...
- 5 Questions To Ask Yourself Before Buying A Stock
1. What do I know about this stock that other investors don't? Every investor who has ever bought a stock believes it to be undervalued or under-appreciated by the market, but before you press the "buy" button it's absolutely critical to...
- Why Moats Matter
I read Why Moats Matter while on Martha's Vineyard. This felt especially appropriate. The moat concept that Morningstar pioneered is all about different kinds of structural competitive advantages. When you are on an island like Martha's Vineyard,...
- Moats Matter For Dividend Investors
"Why Moats Matter for Equity Income" Josh Peters, Morningstar "The first thing you have to remember about dividend investing is that dividends are paid out slowly, though, relentlessly, and they really add up over time. But if you're going to actually...