2000: How deep is Moody's moat?

AUDIENCE MEMBER: My name is Dennis Jean-Jacques from Chatham, New Jersey. I first would like to thank you personally for taking the time out of your busy schedule to visit MBA students throughout the country on a regular basis.

In fact, I consider your visit to the Harvard Business School campus many years ago my personal rational awakening.

My question is in regard to Dun & Bradstreet. Many academics would argue that two of the many factors that determine a firm’s sustainable competitive advantage are the threat of new interest through imitation, and the threat of substitution through technological advances, such as, you know, the internet and things of that nature.

My question is, how deep is the moat around Moody’s and the operating company?

WARREN BUFFETT: Yeah, we don’t want to go into too much detail about our marketable investments.

But I would say that the moat is, just in our view, is far wider, deeper, and infested with far more poisonous characters, in the case of Moody’s, than in the case of the operating company.

We’ve had experience — just in terms of making decisions about how you either obtain credit information, in the case of the operating company, or if you want to obtain ratings on securities or something — I think you’d conclude that Moody’s is a much stronger franchise than the operating company.

Doesn’t mean the operating company can’t turn out to be a better business. It might have more upside under certain circumstances, too.

But if you’re really thinking of, you know, what bad can happen to you, I think that you would regard Moody’s as a considerably stronger franchise than the operating company.

Charlie?

CHARLIE MUNGER: Well, I’d certainly agree. The —

Moody’s is a little like Harvard. It’s a self-fulfilling prophecy. (Laughter)

You know, I hate to think of how much you could mismanage Harvard now and still have it work out pretty well.

WARREN BUFFETT: If you cut the price of the admission to the Harvard Business School by $10,000 a year, you would have less demand, in all probability, than an increase in demand.

I mean, it’s totally counterintuitive in that respect. Because the cachet of the school, in that case, is not only reinforced, it almost makes it necessary, that it be priced toward the top.

So, it — you can throw away the demand and supply curves that they teach you in Economics 101 on something like that.

I — frequently, I have a little fun with — when I attend business schools. Because I ask them, you know, what the definition of a wonderful business is, and we go through all this stuff.

And then I say, you know, I tell them that — really — the best business I’ve seen is the Harvard Business School or the Stanford Business School, because the more they increase the price, the more people want to get in, and the more people think the product is worth.

And that is a marvelous position to be in. (Laughter)

And I thank you for your comments on the — you know, I was lucky enough to have a great, great teacher in Ben Graham at Columbia. And Ben didn’t need to go up to Columbia once a week, on Thursday afternoon, to talk to a bunch of us.

So it — I really feel it’s — I enjoy, sort of, passing that along. I haven’t had any original ideas in this field at all. But I, you know, I had a terrific teacher. And it’s fun to talk to students.

If you talk to a bunch of guys my age, nothing happens. I mean, they just want to be entertained. (Laughter)

But they want predictions always and that sort of thing. So I don’t do any of that at all. I’d rather talk to students. And I thank you for coming.