The Valor Blog.
Investment News and Views, Direct from Our Team.

“Delighting Moats” vs “Parasitic Moats”

I have recently reorganised my thoughts around moats.

One of the least discussed elements of a moat is its permanence. It is a quite subjective matter when evaluating the permanence of a moat. One way to attempt to bring some observations to the argument to reduce subjectivity is to look at the type of moat that a company has.

Is the company delighting its customers or is it a parasitic company that has a captive audience that can’t go anywhere else for its products or services.

The latter type of company can look impenetrable, however as soon as a customer has a better alternative they could leave.

A company such as a drug company might have a very wide moat on a certain drug, however they often raise the price to the point of extreme pain for the consumer (be that the end consumer of the government who subsidises it).

A bank might have a switching cost due to the difficulty of changing loans or accounts, however if they create too much pain for the consumer, or another new “easier” product is created by a fin-tech, the consumer could leave.

The local convenience store might have significantly higher prices than the supermarket 15 minutes away. If a supermarket starts up close to the convenience store, its business is crippled.

A company that delights its consumer is likely to have far more permanent customers.

People are “fans” of Apple. People are “obsessed” with Instagram. People are “addicted” to their double shot, half cream, caramel Frappuccino from Starbucks (or maybe thats just me).

Our portfolio is filled with “delighting moat” companies. A considerable percentage of the mistakes we have made over the years have included a number of “parasitic moat” businesses. Some “parasitic moat” businesses have their place and are acceptable businesses (at the correct price), however they are lower down the pecking order of companies we prefer to invest in.

We are loathed to sell a company that is widening its moat by delighting its consumers. We are quick to sell a company where a manager doesn’t understand what their competitive advantage is and is slowly eroding their moat.