Is Technology Threatening to Attack Buffett's Empire?
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Rishi Chourasia
Oct 15, 2015, 1:18:19 PM10/15/15
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We won't try to hide it.
We are worried...
The continuous assault of technology poses a risk to the competitive advantage - the moat - of many businesses.
The question we are asking is this: What are the chances a new technology destroys the moat of a company over the next 5-10 years?
This question even has Warren Buffett losing sleep. The businesses he once considered impregnable fortresses are now under attack from technology.
Take insurance giant GEICO for example.
The Oracle of Omaha loves this stock so much that when he counts his blessings, he counts GEICO twice! GEICO has been a goldmine for Buffett, but will the future of the company be as bright as its past? Buffett doesn't think so. He is worried that self-driving cars will destroy GEICO's business.
Let's be clear. Self-driving cars are years away from mass adoption. But the threat to GEICO's moat is real and should not be shoved under the carpet. Self-driving cars could dramatically reduce accidents...and insurance premiums.
Many businesses face similar threats from technology.
India's very own software sector is in danger of losing a large part of its business to robots. This is true especially for low-end work. This is why every IT firm worth its name is trying to move up the value chain and stay relevant.
Even pharmaceutical managements are on perpetual tenterhooks. In one fell swoop, a breakthrough can make their whole business model irrelevant.
In fact, we are tempted to claim that hardly any sector is free from the threat of technology. And if this is indeed true, the implications for the moat investor are serious.
Is Buffett's favourite wealth creation strategy losing its edge? Is moat investing dying?
We don't think so. Some of Buffett's businesses are indeed under attack from new and better technologies. But the majority of the kinds of businesses he has invested in will see record profits 5-10 years from now. And technology will actually accelerate - not deteriorate - their profits.
Consider Coke, an old Buffett favourite. Coke's been making a product that's fundamentally unchanged for more than 50 years. And there's no reason to think any technology will impact the way it is produced and consumed fifty years from now.
The million-dollar question, therefore, is how to separate the wheat from the chaff...how to identify businesses with widening, not narrowing, competitive advantages.
We believe it has to do with the point of attack. If a new technology thrusts a dagger in the heart of a competitive advantage, then alarm bells should be ringing.
Let's go back to GEICO to understand this better. GEICO's moat comes from collecting premiums from drivers. However, self-driving cars threaten the very concept of drivers. Therefore, Buffett is certainly right to worry about GEICO's moat.
Another example is erstwhile photography giant Kodak. The company's moat, its cash cow, was the camera film business. The rise of digital technology and mass adoption of camera phones thrust a dagger into Kodak's heart, leading the company to declare bankruptcy. Here again, technology hit where it hurt the company the most, its competitive advantage.
No doubt technology has made moat investing riskier, but wealth creation through competitive advantage isn't going away any time soon. To account for the rising threat of new technology, ask these two questions: First, what is the firm's competitive advantage? And second, can any new technologies strike at the heart of this competitive advantage?
What do you think? Do you think the pace of technological developments will kill the concept of moat based investing?
--
We are worried...
The continuous assault of technology poses a risk to the competitive advantage - the moat - of many businesses.
The question we are asking is this: What are the chances a new technology destroys the moat of a company over the next 5-10 years?
This question even has Warren Buffett losing sleep. The businesses he once considered impregnable fortresses are now under attack from technology.
Take insurance giant GEICO for example.
The Oracle of Omaha loves this stock so much that when he counts his blessings, he counts GEICO twice! GEICO has been a goldmine for Buffett, but will the future of the company be as bright as its past? Buffett doesn't think so. He is worried that self-driving cars will destroy GEICO's business.
Let's be clear. Self-driving cars are years away from mass adoption. But the threat to GEICO's moat is real and should not be shoved under the carpet. Self-driving cars could dramatically reduce accidents...and insurance premiums.
Many businesses face similar threats from technology.
India's very own software sector is in danger of losing a large part of its business to robots. This is true especially for low-end work. This is why every IT firm worth its name is trying to move up the value chain and stay relevant.
Even pharmaceutical managements are on perpetual tenterhooks. In one fell swoop, a breakthrough can make their whole business model irrelevant.
In fact, we are tempted to claim that hardly any sector is free from the threat of technology. And if this is indeed true, the implications for the moat investor are serious.
Is Buffett's favourite wealth creation strategy losing its edge? Is moat investing dying?
We don't think so. Some of Buffett's businesses are indeed under attack from new and better technologies. But the majority of the kinds of businesses he has invested in will see record profits 5-10 years from now. And technology will actually accelerate - not deteriorate - their profits.
Consider Coke, an old Buffett favourite. Coke's been making a product that's fundamentally unchanged for more than 50 years. And there's no reason to think any technology will impact the way it is produced and consumed fifty years from now.
The million-dollar question, therefore, is how to separate the wheat from the chaff...how to identify businesses with widening, not narrowing, competitive advantages.
We believe it has to do with the point of attack. If a new technology thrusts a dagger in the heart of a competitive advantage, then alarm bells should be ringing.
Let's go back to GEICO to understand this better. GEICO's moat comes from collecting premiums from drivers. However, self-driving cars threaten the very concept of drivers. Therefore, Buffett is certainly right to worry about GEICO's moat.
Another example is erstwhile photography giant Kodak. The company's moat, its cash cow, was the camera film business. The rise of digital technology and mass adoption of camera phones thrust a dagger into Kodak's heart, leading the company to declare bankruptcy. Here again, technology hit where it hurt the company the most, its competitive advantage.
No doubt technology has made moat investing riskier, but wealth creation through competitive advantage isn't going away any time soon. To account for the rising threat of new technology, ask these two questions: First, what is the firm's competitive advantage? And second, can any new technologies strike at the heart of this competitive advantage?
What do you think? Do you think the pace of technological developments will kill the concept of moat based investing?
Thanks & Regards,
Rishi Chourasia
(Founder Director)
Vikalp Education
Refine Your Talent
Nagpur | Pune | Mumbai
Website: http://onlinevikalp.com/
Facebook: https://www.facebook.com/vikalpeducation
Twitter :https://twitter.com/MgmtVikalp
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