After ET reported last week that there was no mention of India at the Berkshire Hathaways widely-tracked annual shareholders meeting on May 5 in Omaha, several disappointed readers — including market participants — took umbrage, aiming their ire at Warren Buffett, the USfirms iconic chairman who has a die-hard following in the global investment community. Some of the responses were on these lines: “India will grow irrespective of what Buffett thinks”, “Does Buffetts views on India really matter?”, “Buffett does not understand India”, and so on. Some of what the readers felt could be true, but Buffetts inadvertent snub to India needs to be seen through the lens of his pet theory — moat investing — that has been under attack from formidable critics led by Tesla chief Elon Musk.
Those who attended or followed Berkshire shareholders meeting did not miss Buffetts drift towards China as an investment destination. Buffett has mostly preferred the US to invest, though he has made a few bets outside in countries like China and Israel in recent years. For those wanting to understand why India still does not figure in Buffetts list and why China does, it would be useful to touch upon the theory of moat investing.
Historically, a moat has been the water surrounding a fort or a castle as a protection against invasion. Forts with wider and deeper moats were considered stronger. In investing parlance, a moat refers to a companys ability to have a competitive advantage over its competitors that will help it maintain its market share. It gives longterm profit visibility. Some examples of economic moats are great trusted brands, patents and industries with high entry barriers and monopolies.
In the US, new technology behemoths such as Apple, Google and Amazon have built deep moats around them for the time being with all of them commanding sizeable market share in their respective bailiwicks. These companies have replaced long-time stalwarts such as Coca-Cola, P&G and IBM as flagbearers of moat investing after the water around them started showing signs of drying in recent years, thanks to competition. Buffett, who struggled to come to terms with the new technologies, finally invested in Apple, the iPhone maker, in 2016.
Other than the US, China is the only other country with companies that command huge market shares. The eye-popping ascent of Chinese upstarts — Alibaba and Tencent — and their emergence as technology giants have caught the attention of global investors. These companies command huge exclusive market share in China. So, it should not surprise why Buffett has trained his sights on the country. After all, he has $140 billion to deploy. When asked about emerging markets at the Berkshire shareholders meeting, Buffett said his problem is size, not the geography.
So, it comes as no surprise why India does not appear in Buffetts scheme of things. India is still some distance away from China in terms of size — Chinas GDP is $12 trillion and Indias $2.5 trillion.
It goes without saying that several Indian companies have made big money for shareholders over the last several years, but very few of them have succeeded in creating a sustainable model that falls into the definition of a moat. Domestic companies, which have seen the biggest growth in market capitalisation and have attained scale, have mostly been banks, service providers or franchisees. Companies such as Nestle and Bosch that have been able to command big market shares are arms of multinational companies. In these companies, investors like Buffett would prefer the parent. Some domestic companies which enjoy a strong competitive advantage for now are either too small or have been bogged down by corporate governance problems. Meanwhile, firms with huge competitive advantage, like large private sector banks, are trading at astounding valuations.
The concept of moat should not be seen from the point of investing alone. It is a byproduct of the extent of innovation in a country. It is usually the product that is a moat and not the distribution network. Few Indian companies enjoy such competitive advantage because innovation is not encouraged by most investors in India. Unless local brands with a potential to reach the global audience are created, there is little scope for serious moat investing in India.
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