In one sentence: Phil and Danielle go through the first items of the ten-point Moat checklist: critical parts of the operation, ease of selling, whether customers and suppliers love or need the company, and the three tests of a competitive advantage (is it real, durable, and intrinsic).
Key ideas
- Checklists come from errors. Mohnish Pabrai built a roughly 90-item list from mistakes, including those Buffett confessed in his letters. Buffett's Dexter Shoe loss is the example: China's cheap shoes changed the industry. Mistakes are fine unless repeated. [03:00–06:00]
- Critical parts of this business. What could you not drop and still be this company? Tesla skipped dealers. Monster could not grow until it got Coke's shelf space. If you can't say what the critical parts are, you don't understand the business yet. [08:00–12:00]
- Easy to convince customers to buy. Best when the product practically sells itself: addictive items (Coke), strong needs (nitrogen fertiliser for corn farmers, the iPhone). Danielle objects that this is subjective, since brands like Wrigley's spent a century on marketing. Phil's answer is that this is why he prefers established companies with ten years of data. [12:00–19:00]
- Customers love or need the company. Danielle's edit: "love/need". Harley, Coke and Wrigley rely on love. Microsoft in the 1980s and fertiliser makers relied on need. Phil's warning: when need disappears and customers get a choice, they leave, so watch which one your company depends on. [19:00–22:00]
- Suppliers love or need the company. For CF Industries, gas producers are glad to sell gas that would be flared off. Walmart's suppliers are in a love-hate relationship. This also bears on whether the company's values match yours (Love). [22:00–25:00]
- Name the advantage. For a railroad: moving bulk freight far more cheaply than trucks. [24:00–25:30]
- Durable. Is there anything on the horizon that makes it cheaper still? This links back to the industry-failure work in 256. [25:30–26:00]
- Intrinsic and hard to copy. Intrinsic means the company isn't itself without it. Track rights-of-way are what make a railroad a railroad and nobody can copy them. Danielle adds the lens from Jim McKelvey's The Innovation Stack: a set of solved problems no competitor has solved. Southwest standardised on one aircraft, which cut training, maintenance and scheduling costs. [26:00–29:30]
- Two time directions. Intrinsic looks back (why the company exists) and hard to copy looks forward (what would a competitor have to spend today). [29:30–31:00]
- Tesla as a test case. Hard to copy for now (nobody has matched the combination of range, speed and looks) but not impossible, and Phil won't count on it. [31:00–34:00]
How it maps to RuleOne
- The screen can measure the outcome of a moat (high and steady ROIC, margins) but not the cause. The cause is this checklist and belongs to the reading step.
- "Supplier/customer love or need" is a Love-step check as much as a Moat one. Danielle suggests it might move there.
Buffett, Munger and Graham links
- Munger's "durable competitive advantage" is the second of the four filters (001). Buffett's "economic castle protected by a moat" image comes from his Berkshire letters of the 1990s.
- Buffett's Dexter Shoe discussion (Berkshire letters, 2007 onward) is the error that Pabrai mined for his checklist.
- Pabrai's The Dhandho Investor and his use of checklists follow Atul Gawande's The Checklist Manifesto.
Words to know
- Moat: durable competitive advantage.
- Intrinsic advantage: one built into the company, so it wouldn't be the same without it.
- Innovation stack: Jim McKelvey's term for a set of connected solved problems that competitors cannot copy easily (see 259).
Try this
Choose a company you follow and write its competitive advantage in one sentence. Then answer the next two questions separately: why is it durable, and why is it intrinsic and hard to copy? If the answers sound the same, you haven't separated them yet.
Check yourself
- What is the difference between "durable" and "intrinsic"?
Answer
Durable: it will last given where the industry is going. Intrinsic: it is built into what the company is, so the company isn't itself without it. - Why does Phil care whether customers love or merely need the company?
Answer
A company that relies on need loses when customers get alternatives (Microsoft in the 1980s). A company that relies on love holds customers by choice. - Why did Phil say that a Mohnish Pabrai-style checklist grows from mistakes?
Answer
Each item records an error, either his own or someone else's, so the same one isn't made twice.
Short quotes
"A mistake is really just an opportunity to get better, unless you do it again." (Phil, ~06:00, auto-transcribed)