A new take on investing "Moats" , finding expanding moats

The following article comes from Marcus Today earlier this week

The AFR (Jonathan Shapiro) runs an interesting article today about a flip flop wearing $20bn fund manager in Laguna Beach that has outperformed their global stock market benchmark by 5% pa since 2008 returning 12.8% pa. I have slightly edited this. They say their investment process is to focus on companies with "expanding moats" that have the culture to succeed over the long term. “Every business's competitive advantage is getting weaker or stronger. Instead of looking for wide moat businesses we are looking for ones where we can make the case that, five or 10 years out, the competitive advantage is getting bigger. We call that 'moat trajectory’ and if you get that 'moat trajectory' right, any of the discounted cashflow work is going to look ludicrously conservative. By the same token, if that moat is retreating, they're out, no matter how fantastic the company. The five most dangerous words for growth investors is 'it's still a good company'. Nokia was a good company. About 90 per cent of Wall Street's time is spent on a part of the process (DCF valuations) that delivers 5 per cent of the value. The value is delivered on the big ideas which is: is the moat expanding and is there something driving that expansion, and is the culture supportive? I have said to the research guys, get out of the office, get away from your screen. Go to the beach, pull out a chair and read a thought piece. Read a good book about an industry. Get on the road. Walk the street. Figure out what is going on. That will give you an advantage. It's no surprise most managers are battling to beat the index given they all think and act alike. They are particularly scathing of managers that formulaically apply the tenets of value investing – which is to buy "quality" businesses at below intrinsic value. In our minds, 40 years ago when Buffet popularised it, there were inefficiencies. But today we would argue there are none. If you are doing what everyone else is doing it makes complete sense that you are not going to outperform – there is nothing unique. Finding expanding moats is just half the equation, equally important is finding firms with what they regard as having the right culture. It's why they own Tencent and not Alibaba. They have a checklist developed by retired former Harvard professor James Heskett and author of the Culture Cycle to help identify companies whose culture is aligned with their competitive advantage. Long term, culture is enormous in terms of one business doing better than another. What kills money manager firms is too many assets, people thinking they're 'the guy', and then the market crushes you. We have gone through it, we have failed and it's [a] horrible feeling. Fund managers have to accept the role of luck in their success. If you don't acknowledge that then you are not being honest about life. I see a lot of people that work their ass off and they just don't happen to be in the business that has the economics of money management. Gratitude is actually one of the fund's two core values. The other is fun. If you are grateful you recognise you're probably not the smartest guy in the room and you may not be the hardest working. But because you know that, you're going to keep showing up. And as Woody Allen says, 90 per cent of life is showing up and getting after it. And a fun-loving one? "It seems trivial but if people love what they do, they will work their tail off.”