Investor Education
An economic moat is one of the most important things to understand as an investor. An economic moat is an advantage a company has over other companies, allowing it to protect its market share and continue to generate profitability moving forward. Economic moats come in various ways. Companies can have cost moats, resource moats, cultural moats, network effects, and brand identity.
Read our overview of Economic MOATs
A Good Premise
“When you see things that have never happened before, then you have to question your ability to predict…. The Fed has to meet this now with raising rates and QT [Quantitative Tightening]. And the new part of this isn’t the raising rates—it’s the QT. We’ve never had QE [Quantitative Easing] before like this. Therefore, we’ve never had QT like this. So you’re looking at something they’re going to be writing history books on for fifty years.” —Jamie Dimon (June 1, 2022)
When the financial system was melting down in 2008, the Fed and Treasury stepped in to keep it alive. Many think this was a good idea. It probably was.
When the initial crisis had passed and we moved into the recovery during 2009 and 2010 and 2011 and beyond, the Fed, more or less, stuck around to help. There may not have been a major crisis, but there could be. There’s always something one can worry about if one is looking for something to worry about. And who wants to be the one to take away the punch bowl?
In 2013 and 2014, we had QE3 and QE4. The rate of inflation was too low and the Fed wanted it a little higher. As we said, there’s always something to worry about if you’re looking for it.
And then came the Covid lockdown of 2020. Everything shut down, and we really did have something major worry about. And both the Fed and Congress started writing checks and throwing money around in unprecedented fashion.
The combination of money being given away—whether directly or indirectly through suspending rent payments, students loans, etc.—and disruption caused by Covid have been two of the major known drivers of inflation today. Both the inflation and the handouts were seen as possibilities by Warren Buffett, back when he was writing about the initial intervention mentioned above, in his 2008 Letter to Shareholders:
“This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.”
Good ideas often get taken too far, especially when the effects from implementing certain ideas aren’t seen for years into the future. The interventions that saved the system also helped to create the low interest rates and speculation and inflation we are living with today. We don’t know how this thing that has never happened before will end, or how far the securities prices caught up in the mania—and those that weren’t—may continue to fall, if at all. But the premise for what we have seen is summarized well by another quote from Buffett, this time from the 1997 Berkshire Hathaway Annual Meeting:
“Ben Graham always used to say you can get in more trouble in investment with a good premise than with a bad premise, because the bad premise will shout out to you immediately as being fallacious, whereas with a good premise it’ll work for awhile. Businesses are worth more money if interest rates fall and stocks rise. But then eventually the market action of the securities themselves creates its own rationale for a large crop of buyers, and people forget about the reasons and the mathematical limitations that were implied in what got them excited in the first place. And after a while, rising prices themselves alone will keep people excited and cause more people to enter the game. And therefore the good premise, after a while, is forgotten except for the fact that it produced these rising prices.... People tend to forget about the importance of the price they pay as the experience of a bull market just sort of dulls the senses generally.”
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