No Moat is Safe

My first memories of what a giant moat must feel like, was as a little kid in the early 1980s watching the Georgetown Hoyas defend the rim.

Their pressure jumped through the television and made your softest couch feel uncomfortably trapped. I cannot imagine what it must have felt like to bring the ball up.

I had never seen anything so dominant. When there is an overwhelming advantage of resources constantly leaning on any opponent, every game looked like an unfair advantage, as a kid (and I hear that more and more as an adult in business).

Looking back now, as a portfolio manager for 25 years, I see advantages differently. I will share three of the many lessons I have learned. And, since I’m still a hoop fan, how I get to fill out a bracket every month of the year.

Hoyas Ewing.jpg

Patrick Ewing was by far the most imposing big man. His incredible coach, John Thompson, felt even more intimidating, towering over other coaches and referees at 6’10”. They played for the National Championship three times in Ewing’s four years and won it in 1984.

The following year, they crushed opponents on their way to a 35-2 record. The Hoyas made it to the Finals, against the Villanova Wildcats, who they had already beaten twice that season. Villanova barely qualified for the tournament, getting blown out in its final game by 23 points. They were the lowest seed (8) to ever make the title game (and still are).

1) Remain Curious, Never Convinced

This one principle is most responsible for building our investment firm. Of all that has changed and improved since we started with zero assets under management, this two-sided actively managed discipline stands the test of all times. First, we continue to learn, with never-ending examination of what we do not know. At the same time, we must also leave no room for doubt, when strict sell disciplines are triggered on what we thought we knew. No second guessing leaves more time to turn more rocks over and look for pivotal turning points, perhaps for the first time.

One reason I run Saturday Stock Tournaments every month, is to find out which company surprises me the most to even qualify. Very rarely does it actually make our portfolio’s final roster cut. But none of that time was wasted learning more, and questioning the incumbents.

“Discipline equals freedom. That’s not a contradiction it’s an equation.” -Jocko Willink

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Before reaching the Final Four, Villanova was losing and playing so poorly in the Regionals they only had 17 points at halftime. “I don’t need this” Coach Rollie Massimino shouted in the locker room.

Then he started laughing, holding his hands far apart and explained, “You know what I’d like right now? A big bowl of spags, with clam sauce.” Source credit here is the great Sports Illustrated reporter Tim Layden, who said the tension was completely sucked out of the room, making way for smiles and chuckles…before the comeback win.

2) Where are smiles the crowd can’t see…yet?

When the inputs change, so will the outputs. To be clear, I am not attempting to predict stock price moves. There are operating businesses underneath that wild scoreboard called the stock market, that goes on tilt sometimes. We are simply following the cash from a customer to, and through a business, and then to a stakeholder.

Tourney Bracket.JPG

Math leaves no room for opinions (including our own). While the crowds predict and debate what should happen next, we humbly measure numbers for a better understanding of what is happening.

Hoyas Celebration.jpg

The explanation used countless times to describe Villanova’s shocking 66-64 upset of heavily favored Georgetown, in the 1985 Championship Game, is that – “it took the perfect game to beat them.”

Agreed upon conclusions and their recent scoreboards, often ignore the smaller numbers that make big surprises happen.

Villanova did shoot the ball well that night, but they were far from perfect on offense. Villanova turned the ball over 17 times compared to Georgetown’s 11.

The subtle changes of direction were harder see. Massimino kept adding to his defensive playbook he called “Multiples” leading up to that game. He designed 55 different sets, to adapt to game-flow and keep his opponent off script. Their real magic recipe was combining different ingredients in the same possession; starting out in one defense, for the offense to initiate against, and then changing immediately.

1) Size of Advantage < Its Direction

The illusion of perfect, or an insurmountable lead in the Stock Market, can lead to overpriced and underpriced companies, in our experience. Moats attract crowds, so their prices often reflect the obvious agreement. They also attract other businesses who see those fat margins. The wider the moat is the bigger the upside for a competitor trying to poke any hole, to cause even a tiny leak in it. It takes the opposite of a perfect competitor do that – just the scrappiest or smartest.

The most revealing and repeatable system, with a longer track record than any other, is competition. No lead or advantage is safe, which is the best part of any game or business.

P.S!

Yes, that's the biggest postcript I've never been more excited to write. I can finally imagine what it must have felt like (to try) to bring the ball up against those early 80s Hoyas. My under-sized team is entering a few arenas, with news I am thrilled to announce soon, that would have intimidated the hell out of me for most of my career.

But, I methodically ripped out any page that could be improved, year after year after year. The result is a simpler, more deeply informed AND humbled playbook. I am glad I took every longcut to get here.

The investing principle of remaining curious and never convinced can also apply to our own businesses and families. Those of us trained to look for disruption in industries can do the same in their mirrors. I did.

I am lucky to be more in love with my work today than at any time in my career and can’t wait to do a better job over the next 25+ years. What I’m most looking forward to is sharing and now staking a lot more smiles, in others…