You're describing the kind of the vintage 1934 security analysis Benjamin Graham.
And Benjamin Graham evolved in life as, I guess, we are meant to do.
And after security analysis came the Intelligent Investor, and after the Intelligent Investor
came conversations in which he seemed to be pointing in the direction that Warren Buffett
later followed, namely the notion that the price in value are not this positive.
But what you want to say is a really great company.
And you want that at a good price.
But you want growth for what you don't exactly pay.
But Buffett has tossed out the cigar butt, as it's disparagingly called, the cigar butt
Benjamin Graham to embrace something along the lines of the Michael Porter view of what
constitutes a really, really good investment candidate.
Can you help us understand that evolution, whether it is one we ought to ourselves travel?
So there are elements of truth to it, that all things equal if you had a very cheap company.
But in many cases, the problem is that many cheap companies are on the path to bankruptcy,
so they have a time frame, they are truly junk.
And so I think if you say, well, I want to buy the cheap things that are not going to
go bankrupt-- and that also fits with a sort of probabilistic worldview.
If you say, well, I want to have the cheap thing, something good, something surprising
has to happen for it to revalue.
And I want the longest duration, the longest number-- the most number of chances for something
surprising to happen.
You want the company that's going to last the longest, which means the company that's
least likely to go bankrupt.
And so insofar, as you define quality is that characteristic of not going bankrupt.
I'm in agreement that we should buy cheap high quality companies.
Where I disagree is this new definition of quality, which is, enters Buffett's lingo
in the '80s where he talks about wide moats and competitive position.
And it's really entered the vernacular of a lot of value investors, barriers to entry,
market share.
It seems to make so much intuitive sense, you don't want to-- for example, the podcast
industry.
Yep.
All you need is a microphone and a guest.
That's it.
No barrier to entry.
Anybody can do one.
And you'd expect that for that reason that the returns to podcasting would be just as
small as they actually are.
Where as to you build a nuclear reactor, well, takes a little-- there's your moat for you.
So what's wrong with that particular insight, as trivial as it might seem?
Certainly, there's some truth in it.
Yeah, of course, there is some truth to it.
But once you have businesses that are generating tens or hundreds of millions of profit, the
question is, how do you distinguish between the good ones and the bad ones?
It's not like, of course, if the podcast empire suddenly somehow made it so it was generating
hundreds of millions of profit and was a publicly listed company, you'd say, well, there's got
to be something there that's leading that guy to make money.
I mean, just look at this bottled water.
I mean, why-- We're paying that sponsor-- hold it one more--
Very lucrative sponsorship by this French water company.
But why-- is there a moat to producing water?
No, there is no barrier to entry to producing water, and yet, people buy it.
Moats are water.
So but I think more broadly this idea of moats or barrier to entry, we have to look at where
it comes from.
And it comes ultimately from antitrust theories.
And it comes from this school of thinking that emerges from the general den of bad ideas,
which is the business schools.
And they broadly think that an industry's structure should dictate the conduct of the
firms in the industry, which should dictate their performance.
And even more broadly, a concentrated industry should have firms that have higher profit
margins, right?
I mean, if a monopoly can use its market power to make crazy profits, then something that
has an 80%-- They all want to be monopolies.
--market share, 70% market share.
And that was the idea of quality or moats that really has become popular.
I think it was popularized by Buffett and Michael Porter.
And I think the only problem with it is that it's completely empirically wrong.
I mean, there's just no evidence for that.
There's no evidence that market share and profitability are related.
There's no evidence that that creates barriers to entry.
It's just all a bunch of useless speculative theory.