Moats in Real Life (Mouse Ears Included)

What’s a value investor to do when most of the companies you are interested in are selling for approximately 30 times their 10-year average free cash flow.  Put down that 10k and go to Disney World.

I believe I have a slight genetic flaw when it comes not fully being able to detach from work when taking vacations (thanks, Dad).  Our family recently went to Disney World in Florida and I was struck by a few things. Below isn’t in any way an analysis of the company, but a few thoughts from a reluctant vacationer…

“Invest in businesses with moats.”  Buffett

What does a moat look like in real life?  Buffett coined the term “moat” back in the 1960s and ever since then value investors have been looking for such moats.  They don’t show up on balance sheets, but instead in the ability of a company to “make more money than it should.”

Three Things We Noticed: (for the statisticians out there, this represents an N of 1)

1. Grown couples attending Disney World without kids.  My wife pointed this out to me and I didn’t believe her, so I struck up a conversation with multiple couples hoping to find out that the kids were off with Grandma and Grandpa somewhere else in the park.  No such luck.  That’s a moat….

2. Tomorrow Land looks like it hasn’t been updated since the park opening in 1971.  Tomorrow Land is supposed to be a futuristic vision of Tomorrow, but it looks like it came straight out of the 1960s when it was conceived.  The buildings, decorations, even the uniforms don’t look like they have received one dollar of capex in the past 40 years.   Contrast this with Cedar Point, whose top 10 rides from when I last attended 15 years ago are completely different from when I attended this past summer.  10 entirely new rides in 15 years, that’s a boat load of capex.  Not having to spend a dime (or not very much) updating Tomorrow Land, that’s a moat…

3. Adults doing crazy things (see also #1).  Those Mickey Mouse ears that you see people wearing.  When my 4 year old wears the ears, it’s cute.  When grown men and women are wearing them without a kid in tow, that’s a moat (see picture below).

Disney certainly has a moat.  How much that moat is worth is a different question (don’t forget the Nifty Fifty).  My back of the envelope analysis has Disney valued at about 35x it ten-year average free cash flow (my personal definition of free cash flow).  That’s certainly expensive considering I get excited when a company is selling for 3x its ten-year average free cash flow (and may consider something at 7x).*  Even if Disney is too expensive, it certainly has a moat and provides useful tidbits on what a moat looks like in real life….

Lots of ink has been spilled over what a moat is, but I think there should be more focus on second-level thinking when it comes to moats:

1. If a company has a moat, is that helpful for you as a potential new shareholder?  If you are paying too much for the opportunity to own the company, then such a moat will not benefit you.  Even if a company is great, you still have to pay a reasonable price for it, not an extraordinary one.

2. If a company has a moat, what does it do with the excess cash created by that moat.  If a company takes good money derived from a lucrative moat and throws it at lower-return businesses, then a moat is less valuable because the owners will never see any proceeds from that moat.  See here for great examples of companies that have spent their moat-derived money on non-moat business units. These companies’ moats are so strong, they even prevent the shareholders from getting their hands on the companies’ cash.

I promised to write about something more optimistic.  What’s more optimistic and happy than the Magical Kingdom?  Next time, I will return to my regularly scheduled cynicism.

Photo Credit–google search, i.e. not me…If you look closely at their mouse ears, they are recently married are attending Disney World for their honeymoon.  That’s a moat…

mouse ears


*I once invested in a company selling for 10x its ten-year average free cash flow.  Luckily, I can now invest in that same company at 7x the same ten-year average free cash flow.  Sometimes I wish I wasn’t always so lucky….


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