Dell Computer is the hottest stock in the 90s, the XPS maker recorded 120,000% capital gain from February 1990 to April 2000. Today, the business is declining as the PC industry’s fate dictates. Dell did not join the top 10 best stock performers in the last 10 years (2010-2020) – far from it. When someone chats with us about moat versus growth investing topics – we always take Dell as an example. Meanwhile, an old company like Boeing with a strong competitive advantage has become one of the best stock performers for the last 50 years.
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In This Issue
The growth is ephemeral, right? And the value, boring company with economic moat are here to stay. True, but it doesn’t mean that we can’t invest in a growth company. This article will offer several perspectives for investors. One doesn’t superior to the other.
Table of Content
Breakdown the Characteristic
Before we go to some point or perspective, let us begin by decomposing both examples. We try to distinguish those two in order to get deeper insight.
Dell in the 90s
- Dell has a unique business model compared to its peers. The computer maker cut the middleman and directly sell its product to customers. Moreover, Dell offers “customized product”, which allows the customer to choose specifications they need. This combination allows Dell to lead the industry to boost its growth.
- Dell was led by a charismatic and ambitious person, Michael Dell. This is the man who revolutionizes the industry, as 90s business posters and headlines said.
- At the end of the day, due to the prospect, industry growth, competition occurs and sink a whole industry into decline.
- It has relatively the same business model, boring, no revolutionary innovation.
- No competition, only Airbus from Europe could be considered as rivals. Boeing never recorded stellar growth, but it lasts for 50 years and gives a satisfying return.
As you can see, the description and characteristics answer the question themselves.
Superior Answer for Growth versus Moat Investing: Growth
If and consistently.
How many investors could spot Dell in the 90s, sold it in 1999s – then buy Amazon? If you’re one of them, congrats. People will envy that achievement. Spotting growth is difficult. Predicting the next big trend in the industry is difficult. In 2011, we know that AI will be the next big thing and somehow it still needs hardware, the GPU – so we invest in Nvidia. But, to tell the truth, so many of our experiments fail – the 3D printer, renewable energy turn to be a bad investment. You could hit one or two out of ten – but you can’t score 10/10.
Simpler Answer for Growth versus Moat Investing: Moat
You don’t generate stellar returns like Dell in its glorious day, but investing in Boeing is much easier.
For a deeper explanation of Boeing’s economic moat, the reader could see here
Reinvesting Moat, One Solution of Growth versus Moat Investing
In his blog, John Huber takes Tencent holding as an example. Tencent ecosystem offers super apps and services for its customer, creating high switching costs and at the same time, enjoy the mobile revolution in China.
A company with this characteristic is extremely rare.
Corporate Characteristic, Practical Approach
Well, as practical, seems that we need to map the company into its category. We have as follows:
No Moat, No Growth
Most companies fall in this category, especially commodity companies or former companies that lose their growth steam. Several examples are ICE automakers, laptop manufacturers, smartphone vendors except for Apple and Samsung.
Wide Moat, No Growth
Boring companies here. No competition, no controversial headlines. This is the place for investors to have better sleep at night. Companies here have monopolistic characteristics, you do not need to take care of the rivals. Several examples are banks, aircraft makers, jet engine makers, airports. Just don’t expect astronomical capital gain here.
No Moat, High Growth
These companies enjoy growth momentum, they are Tesla, Teladoc, Didi, Uber, Lyft, Netflix. It is OK to invest here, but stay alert – leave it at the right time since the competition will arrive and stop the party
Wide Moat, High Growth
The elite group – we have FAMAG here, Facebook, Apple, Amazon, Microsoft, Google. Though the growth somehow decelerating, it still has massive opportunities ahead. Other notable names are Visa, Mastercard, Tencent.
Investor Key Takeaway
Ok, what do we have?
- It is really up to you investor, choosing the growth strategy is difficult, choosing a moat strategy has less potential. You could mix and match your portfolio, it doesn’t need to be all-growth or all-moat.
- Somehow, your growth choice will be a loser – like Dell.
- Somehow, your capital gain of moat choice will be capped – like Boeing.
- Choosing the one with both characteristic is the best solution – but it is difficult, much more difficult than one of those two.