This installment of The Matt Allen Letter is free for everyone. If you would like to read about my stock market picks, stock analysis, and much more. You can subscribe here.
I have studied Warren Buffett since I was in high school. I have always been fascinated with his thinking and I still turn to him on a regular basis. Warren Buffett and Peter Lynch have had a profound impact on my investing strategy, and I would like to discuss some of these things below.
I believe that anyone can make money in the stock market, if they focus on doing these things. Warren Buffett preaches to buy a stock within your circle of competence.
(Keep in mind, when you buy a stock, you are buying a company. You become an owner of this company.)
The first thing that I do when looking at a stock is figure out if I actually understand the company.
And when I say understand the company, I mean understand what the stock does, how the stock makes money, and what is the forecast for this company down the road.
Most importantly, I need to know how to value this company. As most of you know, I have a very good understanding of technology companies, and I have a really good understanding of Geo-Politics. I can find companies from these two sectors very easily compared to the rest.
I was horrible at my science classes in high school, I was even worse at my science classes in college, when I decided to show up. (Hopefully my parents miss that part)
Fun fact: Remember when I said that I have a very good understanding of Geo-Politics? In college, my buddy and I decided to take a Geography science class. We thought that we were taking a science class based on maps. Come to find out, geography the science has absolutely nothing to do with finding cities on a map. (Shoutout Stetson Godwin)
With that being said about my history with science, I do not mess around in the Pharmaceutical Sector. I do not understand how much Moderna should be selling their vaccines for. I do not understand how Pfizer can go about pricing their medicine. I simply do not understand this industry and that is completely okay.
When you are trading stocks in the short term and are using technical analysis, you love looking for a catalyst. A catalyst is an event that drastically impacts the stock price. For example, if the price of bitcoin goes up, the price of bitcoin mining stocks go up. If the price of oil goes up, the price of gas will go up.
If you are a sports fan, when Tom Brady decided to sign with the Tampa Bay Buccaners that was a catalyst for Vegas to make the Bucs a favorite.
When you invest in a stock for the long term and are using fundamental analysis, you are looking for a company that has a durable competitive advantage aka a moat.
Think about a castle real quick. We want a business that has a long durable competitive advantage (moat) that is wide and protects a cash flow machine castle (company.) We want this moat to be very hard for another company to destroy. You want to invest in companies that will continue to grow for a very long time in the future.
There are 5 Moats that I will quickly breakdown in a very simple way:
1. Brand Moat
A brand moat is a company that has a product or service that you think about when you need that product or service. For example, when you search for something on the internet, you “google it.” You don’t tell your friends, “Hey, let me go yahoo that.”
When you need a new phone, you say: “I need a new iPhone.”
When you go to a theme park, you say “I am going to Disney.”
2. Price Moat
This is a very hard to moat to get and to keep. However, if you can sustain this moat you will do great in the long term.
A price moat is when a company can keep such low prices that other companies cannot compete with you.
For example, Geico insurance is known as some of the cheapest insurance because they have no middle man. Lemonade Insurance is a tech-insurance company that is working on this.
Costco is a very popular example of a company with a Price Moat. Why do you travel 30 minutes to go shop at Costco? The price of the products are very cheap compared to other stores.
Any moron can open a business and charge a low price for a product. The catch? You want a company that charges low prices because their cost is so cheap.
3. Secrets Moat
This is a pretty obvious moat, these are companies that have patents or trade-secrets.
If a company has a patent on a product, it is illegal for you to compete with them.
For example, if a pharamcuitical company patents a drug, it is illegal to sell that drug unless you are the company with a patent.
4. Toll Bridge Moat
The most common toll bridge moat is a company that has a massive long term deal with the government. A utility company is very common example of this type. PGE in California has been a complete disaster but they are still around because California has no choice.
Palintir is a tech company that has massive long term deals with the government.
I personally believe that algorithms are a toll bridge moat. For example, the instagram algorithm is pretty dang valuable.
5. Switching Moat
Switching moat is when it is to inconvenient to switch from one company to another. For example, your dentist would be a great example of this. Another example of this would be your bank.
In tech, even if yahoo search pops up, I still type in “google.com”
Keep in mind, the company only needs 1 of these things. Most importantly, the company has to be in your circle of competence to pick them out.
In conclusion, ask yourself, can some idiot with a Billion dollars destroy this company. For example, if you gave me $1 Billion dollars and told me to go make a better soft drink then Coca-Cola and beat their company. I wouldn’t have a prayer.
I hope everyone has a great rest of the week!
Stay Hungry, Stay Long