It’s funny, in a way. Warren Buffett and Elon Musk are having a go at each other. It case you missed it, here’s what happened.
In a conference call last week, Musk quipped that “moats are lame.” He was referring to an expression used by Buffett to describe a company’s competitive advantage.
Moats come in many forms. They range from patents to secret formulas to brand recognition to distribution networks. I guess all of those things are lame in Musk’s world.
Musk explained his criticism of a term coined by Buffett in 1999: “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.”
At the Berkshire Hathaway shareholder meeting this past weekend, Buffett responded: ““Elon may turn things upside down in some areas. I don’t think he’d want to take us on in candy.” Buffett was referencing See’s Candies, a company owned by Berkshire.
Not to be one-upped, Musk took to Twitter:
I am super super serious
— Elon Musk (@elonmusk) May 5, 2018
Musk than doubled down on his disdain for moats:
Saying you like “moats” is just a nice way of saying you like oligopolies
— Elon Musk (@elonmusk) May 6, 2018
Moats, Innovation and Oligopolies
Let’s break all of this down. First, if moats are as lame as Musk claims, they can’t result in oligopolies. In Musk’s world, innovation kills moats, and with it the limited competition of an oligopoly.
Second, competitive advantages result when companies and individuals do great work. Coca-Cola has a competitive advantage though its secret formula. It’s a formula loved by millions of consumers. Apple has a competitive advantage because it has created a product that millions of people love and use everyday.
And ironically, Tesla has a competitive advantage because it has built an electric car that people actually enjoy driving.
Third, Musk’s suggestion that moats are a company’s “only defense” against competing companies misses the mark. Buffett has certainly never suggested, that I know of, that companies should simply rest on their competitive advantages. Apple innovates every day. Coca-Cola is innovating. Have you seen its new product lineup? The car industry is innovating as it moves toward autonomous vehicles.
As an investor, a company’s pricing power is a critical factor to evaluate. Pricing power, in turn, often results from a durable competitive advantage.
Has Musk Lost His Focus?
All of this raises some important questions about Musk’s leadership. Rather than quibbling with Buffett and threatening to start a candy company, perhaps Musk could focus on running a profitable business.
Over the past several weeks, Musk’s behavior has been . . . curious.
First, for April Fool’s Day Musk joked about Tesla going bankrupt:
Elon was found passed out against a Tesla Model 3, surrounded by “Teslaquilla” bottles, the tracks of dried tears still visible on his cheeks.
This is not a forward-looking statement, because, obviously, what’s the point?
Happy New Month! pic.twitter.com/YcouvFz6Y1
— Elon Musk (@elonmusk) April 1, 2018
At the time I dismissed it as a silly joke. Like Bill Maher, not all that funny. But to each his own.
Then last week things took a darker turn during an investor conference call. During the call, Musk was asked about Tesla’s capital requirements. The topic is important to any company, particularly those burning through cash. Musk’s response according to the WSJ: “Boring, bonehead questions are not cool—next.”
Musk was then asked what percentage of Model 3 reservation holders have started to configure their orders. This is a relevant question as customers who have made deposits on the car can cancel their order. Musk didn’t answer the question, instead saying, “We’re going to go to YouTube, sorry. These questions are so dry. They’re killing me.”
According to CNBC, Musk later explained his refusal to answer some questions as follows:
The ‘dry’ questions were not asked by investors, but rather by two sell-side analysts who were trying to justify their Tesla short thesis,” Musk tweeted. “They are actually on the *opposite* side of investors. HyperChange represented actual investors, so I switched to them.
His non-answers, however, may have added to the short thesis, as Tesla’s stock price dropped as a result of the conference call. More importantly, short sellers are a fact of life for public companies. Prove them wrong by running a profitable company, not by avoiding important questions on a conference call with sophomoric retorts.
Now we have his claim that moats, that is competitive advantages, are “lame.” He wants to start a candy company to prove that Warren Buffett is wrong about moats. And he’s “super super serious.”
I’ve never held a position in Tesla stock. I’ve never owned a Tesla car. I have test driven the Model S, and found it to be a thing of beauty. I’m rooting for Tesla the company. Through innovation, yes innovation, it has had a meaningful effect on the electric car market. It may do the same thing with autonomous vehicles.
I just hope genius doesn’t derail the company. Oh, and a durable competitive advantage would help, too.
