I hope I didn’t alarm you yesterday with my “holding cash” declaration.

I know it wasn’t the cheeriest statement to make (or a larger article to read). But I’m a big believer in being a realist, which means analyzing the facts and acting on them accordingly.

Now, those same facts that have me setting some extra cash aside also keep me from panicking. So let me reiterate a few things, such as:

  • I am not selling all my portfolio positions.

  • I am not running for the hills.

  • I am not building a bunker in Hawaii or anywhere else.

  • I am not suggesting you do any such things either.

I’m only saying there are good times to take advantage of and bad times to prepare for. That’s just how life goes.

And right now, I can’t help but feel there are some more hardships up ahead… which is why I’m taking precautions. Just in case.

I also want to take this moment to reiterate something I’m always reiterating no matter whether the markets are up or down. The economy can be booming or busting. The sun can be shining or a hurricane has hit.

It doesn’t matter. I’m still going to tell my readers to play it safe.

By this, I mean to keep the bulk of your investable money in tried-and-true companies that pay reliable and growing dividends. You also want to buy into those quality companies when they’re trading at fair value or better.

And here’s one final piece to the puzzle…

Once you’ve made the purchase, keep up on the news. Don’t take it for granted that the businesses you buy will stay safe and stable forever.

You need to know your moats and if they morph.

Even the Best Moats Aren’t Perfect

It was Warren Buffett who popularized the idea of a business “moat” while answering a question at the 1995 Berkshire Hathaway (BRK.A)(BRK.B) shareholders meeting. He said his conglomerate’s goal was to find businesses that feature “wide and long-lasting moat[s].”

Each one should protect “a terrific economic castle with an honest lord in charge of the castle” – one who won’t waste that wide-moat advantage.

As for what that advantage might look like, he explained:

… it can be because it’s the low-cost producer in some area. It can be because it has a natural franchise because of surface capabilities. It could be because of its position in the consumers’ mind. It can be because of a technological advantage or any kind of reason at all…

Basically, if a moat is there, it’s there. And a wise, ethical management team can keep it there for a very long time – even growing it under the right conditions.

But even the wisest, most ethical leaders can fall prey to unexpected circumstances, whether they happen overnight or little by little.

Take Walgreens, a company I used to build for back in the 1990s. Back then, the drugstore chain concept was a great and growing one. And three companies worked hard to dominate the space: Walgreens (WBA), CVS (CVS), and Rite Aid.

The latter was private, but the other two offered share-price growth and dividends alike. Better yet, they operated in a fairly recession-proof industry with wide moats.

They all competed with each other, of course. But it was very difficult for mom-and-pop shops to get in on the action. Or even for new corporate chains to rise up against them once they’d secured their castles.

That was true for years.

However, it started to become less and less true thanks to the rise of Amazon and grocery stores getting in on the industry. Just like that, the drugstores’ moats began shrinking.

Combined with inflation, consumer spending shifts, and a rise in theft, we now see an industry that’s in notable distress.

Nothing Is Forever, Not Even the Widest Moat

As I’ve said before, I don’t expect drugstores to disappear altogether. But as CNBC recently noted, the chains “may need to reinvent themselves.”

As we already know, they’re definitely closing stores. Lots of them, in fact.

I bring this up to highlight how important it is to know not just the companies you buy… but also the sectors they operate in. Because those business spaces can and do affect a business’ moat.

This consideration has been true in any age. Just look at the music industry, where records were all the rage for decades. But then cassette tapes took over. And then CDs. And now digital downloads are where it’s at.

Times? They change.

That’s especially true in the 21st century with the rise of the internet. And I imagine that artificial intelligence (AI) is going to disrupt our daily investing lives even more going forward.

It’s already disrupting Hollywood (hence last year’s strikes). It’s disrupting the auto industry (hence last year’s strikes). It’s disrupting how ports are handled (hence the dockworkers’ strike).

And they say it’s set to disrupt so much more from here, redefining industries left and right.

Some companies within those industries will figure out how to change with the times to keep their moats. Others will not. Just like some companies will adapt to changing administrations… changing consumer mindsets… and changing global structures.

If you want to know which ones will keep making you money, stay alert. And never take even the widest moat for granted.

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

What are some other examples of businesses and sectors that have changed with the times? How do you play it safe with your investments? Write us at [email protected].