It’s always a proud moment when a Berkshire Hathaway shareholder asks the late Charlie Munger, whom he admires most. The answer almost always includes Benjamin Franklin, one of the United States’ founding fathers, and Lee Kuan Yew, the founding father of the sunny island I’m from—Singapore.
Munger has lauded Lee Kuan Yew for having “the best record as a nation builder.” It’s a remarkable feat. In just 53 years, Singapore transformed from a third-world nation to a first-world powerhouse.
When Lee Kuan Yew took office as Prime Minister in 1965, Singapore’s per capita GDP was just US$500, below that of the Philippines and Ghana. Today, it boasts a per capita GDP exceeding US$80,000, surpassing even the United States.
Lee Kuan Yew faced tremendous odds from the beginning. Singapore was a tiny, impoverished nation with no natural resources. The country relied heavily on external sources for food, energy, and even water.
But how did Singapore achieve this extraordinary transformation?
To survive and thrive in the region, Singapore had to differentiate itself. Its neighbors had more natural resources, a larger population, and more land. Lee Kuan Yew recognized that Singapore needed a sustainable competitive advantage—an economic moat—to set it apart from its neighbors and ensure its prosperity for future generations.
The answer was to make Singapore exceptionally favorable for business and trade. The government ensured a clean system and stable rule of law, carefully branding the nation as a reliable and credible destination for investors. World-class infrastructure was developed, and despite the country’s mixed ethnicities, everyone was educated in English. Singapore was also made highly accessible, with efficient land, air, and sea connections.
These strategic initiatives formed the bedrock of Singapore’s economic moat, and Lee Kuan Yew relentlessly expanded it. Because a moat is never stagnant—either widening or narrowing—he ensured that Singapore’s moat was as wide as possible, clamping down on corruption, developing world-leading facilities, and cultivating a highly skilled workforce.
On building prosperity that would last a thousand years, Lee Kuan Yew said, “This was a mud flat, a swamp. Today, this is a modern city. Ten years from now, this will be a metropolis. Never fear. Some people think that we are a small place, they can put the screws on us. It is not so easy. We are a small place, in size, and geography. But in the quality of the men, the administration, the organization, the mettle in a people. And believe me, for the next thousand years, we will be here. I won’t be here, but people like me, and like my friends here tonight, will be here.”
Lee Kuan Yew was not just building a Singapore that could survive an election cycle; he was building a Singapore that would endure beyond his lifetime—indeed, a thousand years.
But what gave him such confidence?
His focus on building a sustainable competitive advantage, an economic moat, would protect Singapore from external threats and ensure its long-term prosperity. This same principle applies to the world of business. Just as Singapore had to evolve and innovate to maintain its edge, companies must continuously strengthen and expand their moats to stay ahead of the competition. The pursuit of a durable competitive advantage is an ongoing process, not a one-time achievement.
The Dynamic Nature of Moats: Expanding or Eroding
As investors, we want to look for managers who are relentlessly focused on expanding the business’s economic moat to enjoy the long-term benefits of compounding.
Profits attract competition like bees to honey, and without an economic moat, these profits will be competed away, leaving investors with mediocre returns on our investments in the long run.
In recent years, we’ve seen businesses with incredible moats start to show signs of wear and tear because management prioritized short-term financial metrics.
Starbucks: A Cautionary Tale of Moat Erosion
A prime culprit would be Starbucks. From 2017 to 2022, under Kevin Johnson, the company spent a whopping US$25.7 billion buying back shares when the free cash flow generated within the same period was only US$23.1 billion. Yes, the company was so aggressive in buying back shares that it took on debt to do so. Diluted shares outstanding declined by 20.7% during this period.
Let’s evaluate if management did these shares buyback well using Buffett’s share buyback framework. According to Warren Buffett, share buybacks only make sense when these three rules are satisfied:
(1) The company has enough funds to maintain its economic moat,
(2) There’s nowhere else to reinvest at attractive returns and
(3) The company’s stock is selling below intrinsic value.
Based on its recent results, the company failed the first criterion—maintaining its economic moat.
The company reported dismal results for its second quarter on 30 April 2024, with same-store sales in North America declining 3% and their active members declining 4.4% sequentially to 32.8 million. Their international operations weren’t looking pretty as well, with revenue declining 5% despite a 9% increase in store counts. After the report, Howard Schultz, ex-CEO of Starbucks, wrote a lengthy post on LinkedIn, highlighting three core problems that need to be addressed:
(1) Need to reinvent its mobile ordering and payment platform,
(2) Overhaul go-to-market strategy and elevate with coffee-forward innovation, and
(3) Repair Starbucks culture.
Needless to say, Starbucks was previously known for taking care of their baristas well, but the company has mistreated its green aprons during this period and many began to unionize due to poor management practices at individual stores.
For a customer-facing business like Starbucks, its green aprons are the face of the brand, and if they are grumpy from poor management practices, customers won’t have the great experience expected of a premium brand like Starbucks.
The Moat Builders: The Critical Role of Management
For investors, especially those investing for the long run, it’s essential not just to look for businesses with a wide moat but also for a management team relentlessly trying to reinforce and expand it.
Many investors like to cite Buffett’s quote, “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will,” and justify their thesis for simply investing in wide-moat businesses and disregarding the jockey. But companies that are this wonderful are extremely rare. In recent times, we have seen seemingly wonderful companies with wide moats perform poorly because they weren’t well managed: Domino’s, Nike, PayPal, and more.
We need to look for leaders who, like Lee Kuan Yew, are doing what it takes to last a thousand years. We need to study if management is building the business for the long run, beyond their tenure, by reinforcing and expanding the business moat. Remember, the true test of a company’s strength lies not just in its current market position, but in its ability to defend and expand its moat over time, ensuring continued growth and prosperity for its shareholders.
Good and valuable
Thanks Loyit.