Economic Moat

Moody's demonstrates a different kind of competitive moat: after Dodd-Frank, any company issuing debt must get a credit rating, and there are only three agencies with a 40/40/20 market share locked in for nearly 100 years. It is a market-mandated oligopoly with extraordinary pricing power. Enstar provides the cautionary tale: a complex insurance runoff business that compounded book value at 20%, but Chuck paid 3x book in 2007. As the secular decline in interest rates compressed all business returns over the following decade, the stock compounded at only about 7% — despite the underlying business performing. He later bought more at $56, nearly 4x below his original purchase price, when the valuation became attractive again. The lesson: starting valuation matters enormously. A 20% compounder bought at too high a multiple can produce pedestrian returns.

"It goes back to this notion of your starting valuation. They compounded book at 20%, but it took 10 years and my return was only 7%."

Rochon's stock selection framework has three pillars. Science: companies need high return on capital, growing earnings, strong balance sheets (debt-to-profit under 4×), market leadership, competitive advantage, and low cyclicality. Management must have high ownership — "in the same boat as we are" — with good capital allocation and long-term thinking. Valuation targets doubling your money in five years, or roughly 15% annually. Art: the best companies are rare, unique, and beautiful — what Rochon calls "masterpieces." He cites NCR, Apple, IKEA, Geico, McDonald's, Starbucks, and Google as business masterpieces from history. Their uniqueness is the equivalent of a moat with crocodiles and piranhas protecting a castle from competitors. Judgment: the subjective third pillar, epitomized by his test for management — "would I like this man to marry my daughter?"

"What you want is to find what I call masterpieces. And they have one quality — they're rare and unique."

An investor's competitive advantage rests on three behaviors: patience, humility, and rationality. Humility means accepting that predicting macroeconomic events is impossible — "so we don't try to predict them." It also means knowing the limits of your circle of competence and recognizing mistakes when you make them. Rochon keeps his firm always invested, citing Woody Allen: "80% of success is showing up." Each year his annual letter awards bronze, silver, and gold medals to their best mistakes — a practice that is "very painful" but essential for continuous improvement. Rationality means resisting fads and being impervious to short-term market quotations, staying calm and focused on the long-term horizon.

"We try not to be affected when others make more money than us in stocks, because there's always fads. And we don't get into fads."

Moats are constantly changing — some expanding, some filling with sand. Rochon once asked Charlie Munger which company has an expanding moat; Munger replied "Google" without hesitation. That single comment prompted Rochon to take a fresh look at Google, and his firm bought shares in 2011 at 15× earnings. The stock has risen roughly 400% since. The key driver of whether a moat expands or shrinks is management — moats are not built by angels, they are built by human beings, and the culture set by top leadership determines their trajectory. But every investment situation is unique. An overly rigid analytical frame causes you to miss things. The right approach: have enduring principles and look for certain qualities, but judge every situation on its own parameters with an adaptive mind.

"I asked Charlie Munger which company has an expanding moat. He said, Google. I think that's an incredible company. We bought shares in 2011 after that comment."

An audience member asks why Rochon holds a tiny MasterCard position alongside a much larger Visa stake. Answer: both are fantastic businesses, but Visa has "a little something more." He holds a few MasterCard shares just to follow the company. Asked why he does not own Apple, Rochon admits it has been a great investment — up roughly 50× in a decade — and acknowledges the growing services revenue is strengthening the moat. But compared to Google, Apple's business relies more on selling new hit products every few years, which carries risk of missing a product cycle. Google's search business is more stable, entrenched, and recurring — so its moat is larger. That said, at 15× earnings for Apple versus roughly 25× for Google, the valuation gap is significant. For Visa at roughly 30×, Rochon cites Philip Fisher: "the further in the future you can see growth, the higher the P/E ratio you can pay."

"I think if you compare Apple and Google, Google's business is more stable, and more entrenched, and more recurring. And I think the moat is larger in Google than Apple."