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Moat versus Growth Investing: 50 years Lesson

In Moat versus growth investing, companies could be classified into growth categories or moat categories. Investors need to be very careful in this field.
growth versus moat
source: freepik

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

  1. Breakdown the component
  2. Superior one, Growth
  3. Easier one, Moat
  1. Reinvesting Moat
  2. Key Takeaway
  3. Q&A

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

  1. 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.
  2. 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.
  3. At the end of the day, due to the prospect, industry growth, competition occurs and sink a whole industry into decline.

Boeing

  1. It has relatively the same business model, boring, no revolutionary innovation.
  2. 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

“Catch Me if You Can“
If (we hope can capitalize this word) investors could consistently (again, we hope this word capitalized) spot a company with stellar growth for years and sell at right time – like Dell, the growth strategy is always superior to the moat counterpart. But, pay attention to those two words.

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.

The problem with growth is, you have to buy the right company (industry) and you have to leave it at the right time. You have to buy Dell when Michael Dell and his ambition begin revolutionized the whole industry, and sell right before the competition trimmed the industry profitability. After that, you have to find another “Dell”, rinse, and repeat. This is the “buy – hold – switch” approach. For the investor who has talent, rationality is hungry for information, and has excellent mentality – growth strategy may be right for you.

Simpler Answer for Growth versus Moat Investing: Moat

“Play long game“
Unlike Dell, investing in Boeing needs less skill. Once you bought, you can relax. You don’t need to switch and search for another Boeing, since your Boeing is here to stay. The aircraft industry has a sky-high barrier to entry – preventing competition, much different from the PC or laptop industry. You don’t need to sell at the right timing – since everything is flat, and…boring

You don’t generate stellar returns like Dell in its glorious day, but investing in Boeing is much easier.

The key aspect of invest in a company like Boeing is finding the economic moat first – if the company doesn’t have it, pass it. One another thing to note it will not generate high returns like a growth stock. Simply said, this is a buy-and-hold strategy.

For a deeper explanation of Boeing’s economic moat, the reader could see here

Aero Industry Competitive Advantage: Moat In The Sky
our article about economic advantage for the aero-related business.

Reinvesting Moat, One Solution of Growth versus Moat Investing

“Best of Two World”
Finally, we come to this question. It should be discussed in another section, but, to shed the light, let bring this here. Reinvesting moat is a term popularized by John Huber and his wonderful blog about investing. A company with reinvesting moat is a company with durable economic advantage and at the same time, enjoys significant growth. It is a combination of growth and moat stock.

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?

  1. 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.
  2. Somehow, your growth choice will be a loser – like Dell.
  3. Somehow, your capital gain of moat choice will be capped – like Boeing.
  4. Choosing the one with both characteristic is the best solution – but it is difficult, much more difficult than one of those two.

Q&A about Growth versus Moat Investing: Will be given next