Eight years ago Todd Wenning was living in London and writing hundreds of articles for the investment website Motley Fool. Today he’s back on home territory in the US and working as a senior investment analyst at the San Francisco-based management firm Ensemble Capital.
In the intervening years Todd has built a following on both sides of the Atlantic for his work on one of the investment industry’s holy grails - company moats. The term “economic moat” was originally coined by Warren Buffett to describe firms with durable competitive advantages that can compound high returns over long periods. His metaphor stuck and the world was gifted a new way of thinking about stocks.
It was while Todd was at Morningstar - which has its own methodology for rating company moats - that he took this qualitative approach to heart. At Ensemble Capital he now spends his days looking for businesses that have the moat-like characteristics that can deliver premium returns.
Todd has been a friend of ours at Stockopedia for some time and he offered a lot of moral support ahead of my road trip to the States this year. With that in mind, it would have been daft not to press him on the reasons why moats are such a powerful way of thinking about businesses. So when we met up, this is what he said...
Todd, tell me about your investing journey and how you started to specialise in analysing business moats?
My moat approach really began to take shape when I joined Morningstar in 2011. They have a very established moat methodology that spells out how you look at a company and what you look for. Whether it’s network effects, switching costs or intangible assets like brands, if you can’t figure out which bucket a company’s advantage goes to, it doesn’t have a moat.
But it’s important to define what a moat is. In capitalism, high profit margins and high returns on invested capital should naturally be competed away. But some companies - when you look at the track records of Coca-Cola, Procter & Gamble and so on - for decades they were able to generate high returns on capital, well above the cost of capital, and create substantial economic value.
So what was it about those companies that enabled them to do that? It had to be one of those moat factors, something that gave…
