i have been reading buffett for quite some time but it was never so clear. thanks for the same. regards rajiv soni
Yet another article that forced me to think harder and cleared my thoughts. Thanks a lot Prof. Bakshi.
Worthwhile and valuable insights, however I think you come down in a different place than do regarding the grey area between moats and floats. Is a company more stable with lots of payables and no debt than a company with lots of debt and very little in the way of payables? I’d respond, wrong question. If the company has a high return on capital, the question of float is of minor importance.
Not that a Blue Chip stamps kind of float or the float of a well-run insurance company isn’t valuable, but with a company like Amazon.com, a company with a low cost supplier kind of advantage, any float related to payables has both risks and potentials associated with it. But with Amazon.com the crucial question is why is its return on capital so low. Because it continually invests in projects that will come to fruition years down the road. So in that case the real issue is, how will those investments ultimately pan out. It has a moat and it has a float, but in my opinion, that’s not the question around which the investment’s ultimate result will depend.
To a lesser extent, in insurance companies, the ultimate issue is return on capital. With a high return on capital, such as the insurance companies like those owned by Berkshire Hathaway, float leverages return. With a poorly run insurance company, float can be dangerous — leverage in reverse.
So my view is that the crucial issue is moat. Float helps or hurts depending on market position, quality of management, etc.
One of the things I most appreciated about your article is your incorporation of Michael Porter’s thinking on competitive advantage in your discussion on moats. I rarely see that, but Porter is the expert, in my opinion, on moats although he never uses that word that I’ve seen. Return on capital is the ultimate sign of competitive advantage or moat, and it can be either in the form of high capital turnover (Amazon.com, Walmart) or high margin (See’s Candies). Or both (Apple, or the IBM of yesteryear).
Anyway, your piece is one of the best I’ve read on the subject so thank you.
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