Many a value investor looks to allocate capital in companies that have “wide moats” which limit competition and contribute to pricing power. This is something long advocated by “my pal Warren” and comes from the idea that a wider moat makes it harder to storm the castle walls. In the Williams Companies, Inc. (WMB), which is in the business of moving natural gas through its network of 38,000 miles of pipeline, you might find a company with more than a wide moat. It might perhaps have an impenetrable castle, or close to it.
For comparative scale, Williams’ 38,000 mile network is longer than the roughly 32,000 miles of rail line making up the Union Pacific Corporation (UNP) railroad, which is the largest in the United States. That is a lot of pipes! It should be clear that it would be very difficult to replicate that infrastructure. But let’s go look even deeper.
Suppose you were given free of charge all the pipes, fittings and related material to replicate the network. Furthermore you were given the management, engineering design and construction labor free of charge as well. Add to this a free and clear “right of way” approved by congress and signed into law by the president that would allow you to build your network without disruption even if you wanted to run it through the middle of city hall, your local church or country club, or even the most environmentally sensitive path. Finally you were given a blank check to accommodate any unforeseen necessities to accomplish your build out and the hiring of all the people it would take to run and maintain the business.
What an amazing gift all of this would be, and with all that you could not compete with the Williams Companies. The reason is there is one very important missing ingredient, time. How long would it take to build out the network? Ten years? Twenty years? Perhaps even thirty years? The actual existing network took far longer. Since you do not have all of these gifts and no magic wand I think we can agree it would be a very long time to replicate WMB. So long in fact that it may be close to impossible, thus giving it an impenetrable barrier to entry. This is why you find businesses of this type are often aggregated with others, growing organically, and by acquisition, reducing competition all the while.
It is very important to create a watch-list to follow companies like this with the objective of someday having an irrational market present you with a buying opportunity. Patience is not just a virtue, it is profitable.
Disclosure: As of the time of this post we own stock and options positions in The Williams Companies, Inc. (WMB)