The Biggest Moat in the World

Had some back and forth the past few days with some folks about Google’s stellar Q3 results. I have owned a decent sized position in Google since I launched the Tarpon Folio two years ago, and added more shares this summer. They got way too cheap.

As I told some folks earlier, though, benefiting from last Friday’s surge in price wasn’t due to any particular insight into the quarter on my part. Good things happen when you combine moats with cheap prices. And Google is simply the most competitively advantaged company in the world today – bar none.

From Prof. Bruce Greenwald at Columbia, via the highly recommended book The Curse of the Mogul: What’s Wrong with the World’s Leading Media Companies:

The quest to identify a single ingredient that explains Google’s remarkable results and resilience is itself misguided. Google is the rare company that seems to have strong elements of all three of the most important sources of competitive advantage identified – economies of scale, customer captivity, and cost. More remarkable is that Google displays multiple manifestations of each of these categories of advantage: Google achieves scale both by the relative size of the fixed cost and network effects, it retains customer captivity of both consumers and advertisers because of habit and switching costs, and it secures a major cost advantage through proprietary technology and learning.

Google is also, among other things, way out front in terms of turning computing power into a utility. If you invest in technology companies and have not yet read The Big Switch by Nicholas Carr, put that margarita down this instant and go buy it here right now.

Disclaimer: My investors and I own shares of Google. This post in no way constitutes investment advice. Commentary on this blog should never be relied on in making an investment decision.

Cale Smith

About Cale Smith

Portfolio Manager at Islamorada Investment Management.
This entry was posted in Our Portfolios and tagged . Bookmark the permalink.

2 Responses to The Biggest Moat in the World

  1. Saj Karsan says:

    I agree with you about Google’s moat. But I also feel they are wasting this advantage to some extent by spending a lot in areas where they have no moat. Or do you think their lack of focus on shareholder value is irrelevant in the grand scheme of things considering the size of that moat.

    • Cale Smith says:

      Yeah, the prioritization of what sometimes looks like experiments over traditional financial discipline is sometimes a bit head-scratching, but it’s hard to argue that they can’t afford it, and that they learn quickly from those experiments is probably what most distinguishes their culture from, say, MSFT. So, given what they’ve accomplished to date, I tend to give them the benefit of the doubt. And, to their credit, they’ve been upfront since day one that they’d act like that. Just kinda comes with the territory.nnAnd I don’t think they lack focus on shareholder value as much as it is that their focus is much more about the longer-term than any other public company. If your timeline is six months, it seems kinda odd to be buying stakes in wind energy transmission lines. But if your timeline is 50 years, it could end up being very smart.