If you don't understand moats, you don't understand Chris Hohn.
In an interview with the In Good Company Podcast, Hohn shares his focus: finding industries with strong moats or high barriers to entry. Without moats, companies suffer 1) competition, which kills profits, or 2) substitution, which kills business.
Hohn lists industries that lack moats: banking, auto, retail, airlines, wireless telecom . . . the list goes on. These industries are extremely competitive, both in terms of existing players and new technologies. He says investors underestimate the forces of competition and disruption; just avoid it.
So what's left?
Companies with real moats:
- Physical assets, such as airport, railroads, and telecom towers, things that require a lot of money to build or buy.
- Intellectual property, such as aircraft engines. They are nearly impossible to replicate. (Consider that General Electric was the last entrant into the engine business . . . 50 years ago!)
- Scale, which gives companies economic leverage, usually buying power. Think Amazon, Costco, or Home Depot.
- Network effects, which increase the value of services as more users, buyers, or sellers use them. This is the world of Visa, Meta, or PayPal.
- Brands, such as Coca-Cola, Gillette, Nike. No need to say more.
- Switching costs, which make customers reluctant to mess with a product or service once installed. Microsoft's office franchise—made up of applications, processing, email, security—becomes impossible to switch once entrenched.
Hard lessons in painful investments in companies lacking moats drove Hohn to become obsessed with moats. Unless I want to live these painful experiences, I should be obsessed, too.