Low interest rates cause larger amounts of competition with incumbent companies because the hurdle rate needed to provide sufficient returns is so low. There is also the benefit of having businesses priced higher across public and private markets, due to the lower rates. In other words, we believe Munger is wrong that he has “benefitted” from these low rates “undeservedly.” The low rates that the voting machine is applauding towards a higher price on Berkshire Hathaway’s stock could also be the precise invitation for competition to enter the market and compete with their operating companies. This in turn would hurt the weighing machine for their businesses.
During the Berkshire Hathaway meeting, Buffett was asked about the squeeze on the profit margin of McLane Trucking. He commented that it was a 1 percent profit margin business in grocery distribution for the trucks, even prior to this episode. He showed disappointment in the collapse of the trucking company’s margins.
When commenting on moats later in the meeting, Buffett stated:
There’s certainly a great number of businesses. This has always been true, but it does seem like the pace has accelerated in recent years. There have been more moats that have become susceptible to invasion, ah, that seems to be the case earlier, but there’s always been the attempt to do it. And there, here and there are probably places where the moat is strong as ever, but you certainly should be working at improving your own moat and defending your own moat all the time.
Buffett later commented that technology wouldn’t be what kills Berkshire Hathaway. We would argue that the large number of moats which have been affected in the interim is closely tied to the cost of capital. McLane may have weak competitors who have lower margins and are holding on to market share due to the low cost of capital. When interest rates are historically low, it’s much easier for even marginal companies to raise money via debt markets.
Newer and untested market entrants with capital in-hand are creating new competition and are a hallmark of this era. If somehow technology is connected to the story behind the company, it seems as easy as finding oxygen on planet earth. We will argue that the numerous moats being “invaded” is tied closely to an abundance of money tied to the historically low rates.
To summarize, the voting machine’s willingness to price companies higher based on low rates is directly affecting the long-run value of businesses, which ultimately gets weighed. The great equalizer is that change will happen and rates will rise.
The Voting Machine Vs. The Weighing Machine In Our Holdings
We own banks that are affected by the low rates and get low applause from the voting machine. We own media companies that get low levels of appeal from the voting machine because of low margin competitors that think that they will win based on the total addressable market of tomorrow. We think these company’s moats, and thus value, only increase with the cost of capital rising.
We also own businesses that aren’t affected by rates, but instead know-how. The homebuilding business is a people, plant and equipment business. Capital and technology can help somewhat on the margin, but they cannot solve the woes of this business. It still is labor, land and demand for homes. We own Disney (DIS), who owns vast content libraries for all ages of consumers. Disney’s business isn’t based on the price of money, but instead the customer appeal for their characters and stories. We like to think of those as non-tangible and non-duplicable.