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🔑 Key Takeaways

  1. Investing in steady compounders with a strong economic moat, growth potential, reasonable price, solid management, and high returns on invested capital is ideal for long-term gains, especially during market downturns.
  2. Technology companies offer wider moats and superior business models due to their rapid advancements in technology. The digital revolution is still ongoing, with AI and related technologies driving profits for companies like Alphabet.
  3. Alphabet's dominance in search gives it a powerful competitive advantage, and its strong brands and enduring business model make it a solid long-term investment worth considering.
  4. Alphabet's heavy investments in emerging technologies like autonomous vehicles, healthcare, and Google Cloud, may not yield immediate profits but are strategic long-term plays that will fuel future growth, making it a valuable asset for value investors.
  5. Amazon's value doesn't solely rely on book value or low price earnings ratios. Value investing can still be applied to non-value stocks like Amazon, as investing is all about the calculation of putting money now to get more later on.
  6. Amazon's strong e-commerce, advertising, and AWS businesses, along with their commitment to low prices and customer satisfaction, continue to drive their growth and success.
  7. Amazon's network effects make it difficult for competitors to achieve profitability, but strong growth in e-commerce and cloud computing suggest long-term buying potential.
  8. S&P Global's diverse business segments and subscription-based revenue model have contributed to a substantial revenue growth, but their cyclicality may pose a risk in poor economic conditions. Sherwin Williams is another strong company that is resistant to technological disruption.
  9. Sherwin Williams' large distribution network, consistent operating margins, and diversification across consumer brands, Americas, and industrial customers has helped them weather the 2009 financial crisis. Their 150-year legacy of innovation and brand loyalty make them a great investment opportunity.
  10. Sherwin-Williams' dense store network, fleet of trucks, and customer-focused culture give it an edge in the Americas group. Its partnership with Lowe's and disciplined approach to capital allocation make it a potential consideration for investors seeking strong moats.

📝 Podcast Summary

Importance of Economic Moat and Growth Runway for Long-Term Investments

Having a strong economic moat, which is a distinct competitive advantage that a company has over its competitors, is a critical factor for long-term investment. The economic moat can be qualitative, such as a brand or a network effect, or quantitative such as high returns on invested capital. It is equally important to ensure that the company has a growth runway ahead of it, and the company is trading at a reasonable price, has a solid management team, high returns on invested capital, and not too cyclical. Companies with these characteristics are called steady compounders. In a bear market and teetering on a recession, there are opportunities to add wonderful companies with a wide moat and at a discounted price.

Technology Companies: A Strong Investment Choice for Investors

Investors should not overlook technology companies when making investment decisions because of their wider moats and superior business models. The rapid advancements in technology have dramatically changed what constitutes a superior business today, and digital companies have transformed the world economy, creating most of the incremental wealth in the world today. Big tech companies have some of the strongest moats the world has ever seen due to their superior returns on capital employed. Technology companies today dominate our daily lives so thoroughly that it's natural to think that the digital revolution is largely complete, but that's not true in many ways. The rise of AI and related technologies like Chat, GPT, has made Alphabet one of the most dominant and profitable companies in the world.

Alphabet's moat and strong business model

Alphabet's moat is built on Google search, which dominates the search market and leverages a network effect to improve its product and collect more data. The free Google search costs nothing for users, yet is invaluable and holds an 84% market share. YouTube holds similar characteristics. While advertising revenue may be impacted during a recession, Alphabet's highly profitable business units YouTube and Google Cloud exhibit strong, growing revenues. The disruption from competitors such as Microsoft's open ai may not be enough to shift Google's dominance, as even Jeff Bezos admits. Alphabet is a trillion-dollar company with a strong brand and an enduring business model, making it a solid long-term investment.

The Future-Focused Strategy of Google's Parent Company, Alphabet

Google excels in services, which accounts for 70-75% of economic activity, and advertisers don't mind paying Google as it's both cheaper and more effective than advertising on traditional media. Alphabet is investing heavily in autonomous vehicles, healthcare, and Google Cloud, which may not be earning money today but will in the future. Value investing means getting a lot more than you're paying. Tech companies like Google can report higher current earnings if they want but they're in growth mode and investing dollars today that will be worth more dollars in the future. Comparing tech companies' current profits to legacy companies' profits is misleading as the former is just beginning to grow while the latter is ready for harvest.

Renowned Investors' Exposure to Amazon and Their Perspectives

Investors like Bill Miller, Bill Nygren, Tom Gayner, and even Warren Buffett all have exposure to Amazon stock. Bill Miller thinks Amazon IPO is the best investment decision he ever made, and he regrets ever selling a share of Amazon. The company's estimated worth is about 1.5 trillion while its current valuation is around 1 trillion. When questioned about Berkshire's investment in Amazon, Warren Buffett said that value investing is not connected to book value or low price earnings ratios, and they are absolutely following value principle. Berkshire's investment in Amazon does not signify a shift in investment philosophy away from value investing principles practiced for 70 years. Investing is all about a calculation of putting out some money now to get more later on, and it applies to both bank stocks and high-valued assets like Amazon.

Amazon's Strong Moat and Growth Potential

Amazon has a strong moat in e-commerce with one of the strongest third-party seller services and Amazon Prime. They also have a valuable advertising business and a cash cow in AWS. Nick Sleep identified Amazon and put his net worth practically in the company along with Costco and Berkshire Hathaway for their scaled economy. Amazon continues to ensure low prices for customers, especially with Amazon Prime’s two-day shipping, which required a lot of capital. Despite the Covid pandemic, Amazon is still in growth mode and has the potential to profit off every sale on their platform with pricing and fee adjustments.

Amazon's Dominance in E-commerce and Cloud Computing

Amazon's fulfillment centers and immense network effects, including Amazon Prime, make it extremely difficult for other companies to compete and achieve profitable margins, accounting for 40% of all e-commerce sales in 2021. They also have the largest cloud business in the world with AWS, locking in more companies into their ecosystem with high switching costs. Despite recent dips in free cash flows, Amazon continues to reinvest back into the growth of the company, creating customer goodwill by continually offering low prices. The company's strong and consistent growth in important business segments shows potential for great buying opportunities in the long-term, especially with the secular trends of e-commerce and cloud industries.

S&P Global's Strong Business Segments and Revenue Growth

S&P Global (SPGI) has a strong moat with four major business segments. The ratings business is the most cyclical and contributes to 57% of operating profit. SPGI's index business represents 17% of operating profit, while market intelligence and Platt segments contribute 15% and 11% respectively. 39% of company revenues are subscription-based, and the index business is also sticky. SPGI's fundamentals have improved substantially in recent years with a 50% revenue growth since 2019 and operating income increasing by 64%. However, their cyclicality might come to haunt them in poor economic conditions. Sherwin Williams is another strong company that is unlikely to be disrupted by technology.

Sherwin Williams: A Quality Company with Strong Moat and 150 Years of Innovation

Sherwin Williams, a paint and paint products manufacturer founded in 1866, has a strong moat due to consistent operating margins and a large distribution network of nearly 5,000 company-owned stores, which is advantageous for timely delivery. The company's business is primarily driven by three segments, consumer brands sold in retail stores like Lowe's, Americas sold in its own stores, and performance coatings sold to industrial customers. The company experienced a decline in revenue during the 2009 financial crisis but recovered quickly. Sherwin-Williams is a quality company trading at a premium price, with an EV to ebis of around 27. The company has competitive advantages from 150 years of innovation and brand loyalty, making it a wonderful company at a fair price.

Sherwin-Williams' Strong Competitive Advantage in Painting & Coating Sector

Sherwin-Williams has a strong competitive advantage in the painting and coating sector due to its dense store network, fleet of trucks, and customer-focused culture. The company's vertical integration and proximity to its customers give it a significant edge in the Americas group, where it dominates with a 50% market share. Sherwin-Williams' partnership with Lowe's further widens its moat by making it the exclusive paint supplier for the home center. The company's clear cash flow priorities, disciplined approach to capital allocation, and strategic acquisitions have made it a respected brand with excellent management. Its steady growth rate and low share of a large and growing market make it a potential consideration for investors seeking strong moats.