Battle of the Fan Boys: Buffett versus Musk

Musk

Saturday, was a big day for investors all over the world. It marked another Berkshire Hathaway Annual General Meeting (AGM).

Thousands of Berkshire shareholders flooded into the CenturyLink Centre just to see two old guys talk — Warren Buffett and Charlie Munger.

This year was no different from last. The two old men answered shareholders questions for hours, imparting wisdom in each response.

The seven hour video stream seemed almost too quick. Investors will again have to wait another 12 months before Warren and Charlie are back up on the stage.

One highlight from the meeting was Warren’s response to Elon Musk.

But a week before, Elon decided to trash one of Warren’s most famous moat concepts. In a conference call Musk told analysts, ‘moats are lame.

They’re like nice in a sort of quaint, vestigial way. But if your only defence against invading armies is a moat, you will not last long. What matters is the pace of innovation — that is the fundamental determinant of competitiveness.

To which Warren partly agreed with Elon.

Certainly you should be working on improving your own moat and defending your own moat all the time. And Elon may turn things upside down in some areas.

However, ‘I don’t think he’d want to take us on in candy,’ Warren said referring to See’s Candies with a smile.

Why you wouldn’t buy a Musk bar

Finding strong moat is what Buffett has based his career on. If he makes an investment you can bet that business will have a moat. Meaning some advantage or quality that protects earnings and tends to improve earnings power over time.

Many of his most well-known investments — The Coca-Cola Co. [NYSE:KO], Burlington Northern Santa Fe, See’s Candies and Apple, Inc. [NASDAQ:AAPL] — all have very strong moats.

Elon on the other hand has built his career on constant improvement. Much like Steve Jobs, Elon wants to create businesses that are a net positive for the world. And the way he goes about it is to think differently and innovate.

As you can imagine, fans boys from both sides have lined up behind their champion.

But in fact, both are correct. 

Elon is right saying that businesses always need to improve and innovate. It’s how most tech companies thrive over the years…sans Microsoft Corp. [NASDAQ:MSFT].

Buffett is also right, and has been for decades, in saying moats are a foundational element in long-term investing.

Upon hearing Buffett’s response, Elon couldn’t help but send a kind-hearted response back. I’ve included Musk’s cheeky tweets below.

Elon Musk Tweet

[Click to open new window]

The next day in a CNBC interview, Warren came back with:

If you look at the leading candy bars for example for the last 50 years, I think you’ll find Snickers on top, then you got M&Ms, Hershey’s is in there at number three. I can’t take them on. I don’t think Elon can take them on…they have moats.

To emphasise the point, Warren asks listeners to imagine someone going to their local 7/11. They’re in the mood for some candy. One can only guess, by statistical average, they want a Snickers bar.

But as soon as you ask for a Snickers the attendant behind the counter says he’s instead got a Musk bar. And even better, it’s 10 cents cheaper than the Snickers.

Warren believes most people will simply ask for the Snickers. ‘If he doesn’t give you the Snickers you’ll go across the street and buy the Snickers,’ Warren said, explaining brands as just one type of moat.

You could argue that Tesla has been so successful (share price and demand) because of their brand. A Tesla car carries far more weight than any other electric car. Buying a Tesla is similar to buying a can of Coca-Cola.

Both brands are associated with very positive feelings. It means Tesla and Coca-Cola could continue to generate sales far higher than any competitor.

Moats, however, are not exclusive to businesses. Among countries, there are qualities which make some better than others.

How China plans to build their moat

Almost forever, Warren has been bullish on America. It’s a system that works, he often says. It’s one where living standards and wealth continue to grow by each generation.

The system works, largely because of policies, which help businesses prosper and aspire to be better.

More than 11,000 kms away, China is actively building their own moat. For a time China was like Microsoft. They copied what worked and that did wonders for their economy.

Now, China is taking the Elon approach. The government is actively funding research, technology and scientific projects. They’re creating encouraging policies to help tech firms prosper.

They don’t want to be Microsoft anymore. China wants to invent and pave a new wave for the future. China wants to be like Apple.

As you’d imagine, an industry seeing huge benefits in China is technology. Even as the US looks to bans all tech transfer to the country, China is fast building a self-sustaining tech scene.

Click here and let me show you how you could profit.

Your friend,

Harje Ronngard,
Editor, Money Morning

Harje Ronngard

Harje Ronngard

Harje Ronngard is the lead Editor at Money Morning. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation.

Leave a Reply

Be the First to Comment!

  Subscribe  
Notify of