Elon Musk and Warren Buffett are two of the most famous figures in the entrepreneurial ecosystem, but their approaches to investing could hardly be more different. Musk is a fast-moving iconoclast who puts his faith in the highest of high tech. Buffett is seen as a venerable elder statesman, a long-term investor who favors stodgy industries such as banking and insurance.
Like superheroes squaring off for battle, the two Titans recently engaged in some verbal sparring about...candy? Well, not exactly--the subject of the divas' disagreement actually has to do with moats. "I think moats are lame," Musk told analysts on Tesla's recent earnings call. "If your only defense against invading armies is a moat, you will not last long. What matters is the pace of innovation--that is the fundamental determinant of competitiveness."
As you've probably guessed, Musk was not referring to a ditch filled with water, but rather to a Buffett-coined business term. An economic moat is a competitive advantage that protects a business against challengers. Moats are an important part of Buffett's investing philosophy. "If you've got the power to raise prices without losing business to a competitor, you've got a very good business," he said in 2010.
The Oracle of Omaha is an admirer of the Iron Man, but he couldn't allow Musk's fling against moats to go unanswered. "There are some pretty good moats around," said Buffett at Berkshire Hathaway's recent shareholder meeting. Technology is a threat, but it hasn't made moats irrelevant. "Certainly you should be working on improving your own moat and defending your own moat all the time."
"Elon may turn things upside down in some areas...I don't think he'd want to take us on in candy," Buffett continued, referring to See's Candies, a Berkshire Hathaway brand that commands a fanatical following on the West Coast. He surely didn't expect his throwaway comment to awaken Musk's competitive nature.
"I'm starting a candy company & it's going to be amazing," tweeted the mischievous Musk. "Then I'm going to build a moat & fill it w candy. Warren B will not be able to resist investing!"
Is Musk really going to start making candy? I (and thousands of TSLA investors) sincerely hope not. A more pertinent question: are moats still relevant in today's world of exponentially improving technology?
"Saying you like 'moats' is just a nice way of saying you like oligopolies," the entrepreneur tweeted. Buffett makes no secret of his attraction to oligopolies--for example, the "big three" credit rating agencies, which together control over 95 percent of their market. (The Nation recently took Buffett to task for his monopolistic tendencies, painting him as an enemy of free markets.)
However, a Buffetterian moat doesn't have to be an oligopoly--it can be anything that forms a daunting barrier to competitors--a powerful brand (Harley-Davidson), a network effect (Microsoft) or access to cheap suppliers (Walmart).
Musk would probably say that Tesla has never relied on moats--the company opened up its patents to the industry in 2014, and he has encouraged other automakers to get into the electric vehicle space. However, Tesla has several competitive advantages that could be described as moats--its battery technology is in a class by itself, and its Supercharger network has claimed many of the prime charging sites around the world. The Tesla brand is one of the strongest in the business.
However, as many writers have pointed out, if and when the legacy automakers decide to get serious about EVs, their massive capital and economies of scale will quickly change the equation. The reason Tesla's moats have held is that the enemies haven't bothered to assail them. So far, Big Auto has built just enough EVs to satisfy regulators, and has chosen not to stoke demand through advertising. However, there are signs that that may be changing, and if it does, no moat will keep the barbarians at bay. As Musk seems well aware, rapid innovation will be the only way to secure the castle.