Identifying an Economic Moat – Deliberate Practice Exercise

Sustainable competitive advantage (or an economic moat) is a company’s ability to maintain or grow their earnings and protect their market share from competitors over time. Warren Buffett famously shifted his investing style from a focus on finding firms severely undervalued to one focused on investing in quality firms that can sustain their earnings level far into the future.

I believe an important skill that needs to be developed and improved is the ability to successfully identify firms that have a sustainable competitive advantage and are therefore likely to be sound long-term investments.  I think it is possible to set up an exercise that would allow an investor to improve their accuracy in this area. To be effective the practice would need to break down into two key components:

  1. Evaluating whether a company has an economic moat
  2. Feedback on whether companies identified maintained their advantage

Economic Moat – Exercise

  1. Pick a year to evaluate (5-10 years ago).
  2. Based on set criteria, evaluate whether the target company had a sustainable competitive advantage in that year.
  3. Compare the results from step 2 to the company’s performance over the following 5 years – was the conclusion in step 2 accurate?
  4. If incorrect, try to identify any mistakes made or find any external factors that may have changed the outcome.

I plan to use the exercise above as a way to improve my ability to identify companies with a sustainable competitive. The form of the practice will undoubtedly be revised (and hopefully improved) but I believe this is a good starting point and meets the basic requirements of deliberate practice that should result in a steady improvement in my abilities.


The Plan

The purpose of this blog is to track my thoughts and progress as I try and to use the principles of deliberate practice to improve my ability to make investment decisions.

Generally, when looking at opportunities I will be using a value approach similar to Buffet/Munger/Greenblatt and sometimes Graham. The first question then is where to start and where to focus my efforts. How can the investing process be broken down into constituents that can be rehearsed over and over? How can I receive useful feedback from the practice?

Following a value investing approach requires two main components:

  1. Accurately assessing whether a business is undervalued.
  2. Establishing the quality of the business.

I believe focusing on improving my ability to improve both of the components above will result in a much greater ability to invest profitably. Undoubtedly there are other aspects to investing that will need to be developed and may lend themselves to deliberate practice as well (e.g. managing cognitive biases) but for now I will begin with two points stated above.