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Start for freeIntroduction to Moody's Investment Decision
In a recent episode of the Joseph Carlson Show, the spotlight was on the strategic addition of Moody's to the host's investment portfolio. With an initial investment of $5,000, the choice was driven by Moody's dual role in the global credit rating sphere and its profitable subscription business, Moody's Analytics. This decision underscores a broader investment philosophy aimed at enhancing portfolio quality through compounding machines - investments that offer sustainable, long-term growth with robust returns.
Why Moody's?
Moody's stands shoulder to shoulder with S&P Global in the global credit ratings market. However, it's its subsidiary, Moody's Analytics, that significantly contributes to its attractiveness as an investment. Approximately 50% of Moody's revenue comes from this highly profitable subscription service, which offers a range of financial analytics tools and insights. This diversification of revenue streams, coupled with its dominant position in the credit rating industry, positions Moody's as a potential compounding machine.
The Criteria for Portfolio Addition
When exploring potential additions to his portfolio, Carlson seeks companies that not only complement but elevate his current holdings. This involves a stringent selection process, where the goal is to avoid 'diworsification' – a term popularized by Peter Lynch referring to additions that dilute the portfolio's overall quality. Companies like Microsoft, Apple, and Costco have set a high bar, being leaders in their respective sectors with consistent performance and growth. Moody's, with its strong market presence and dual revenue model, fits this criterion by offering both stability and growth potential.
The Compounding Machine Phenomenon
Carlson delves into the concept of 'compounding machines' – investments that are highly profitable, face minimal competition, and have a clear path to sustained growth. Such investments are rare but can significantly impact one's portfolio over time. Historical figures like Benjamin Graham, Warren Buffett, and modern investors have achieved remarkable success by holding onto these compounding machines. Moody's, with its entrenched position in the credit rating sector and expanding analytics division, exemplifies these characteristics.
Moody's Dual Revenue Model
Moody's Investor Services
The first half of Moody's business is its investor services, which primarily deals with credit ratings. This segment enjoys a duopoly with S&P Global, controlling a significant share of the market. The stability of this market share, coupled with the high barriers to entry for competitors, contributes to Moody's profitability and growth potential.
Moody's Analytics
The second half is Moody's Analytics, a subscription-based service benefiting from Moody's vast repository of financial data. This division offers analytical tools and insights, helping clients make informed decisions. Its high retention rate and consistent growth underline its value to the overall business.
Financials and Future Prospects
Moody's financials reflect its strong market position and operational efficiency. With high margins, consistent revenue growth, and a solid balance sheet, the company stands on firm financial ground. The forward-looking statements suggest continued growth, particularly in its analytics division, further cementing its status as a desirable investment.
The Boeing Controversy
In other news, Boeing faced setbacks with its 737 Maxes, highlighting the importance of corporate culture and safety in investment decisions. This incident serves as a reminder of the risks associated with neglecting these aspects, contrasting sharply with companies like Moody's that maintain high operational standards.
Wall Street Bets and Insider Trading Query
A humorous yet thought-provoking question from Wall Street Bets about insider trading during a Boeing incident was discussed. Such discussions underscore the unpredictable nature of investing and the importance of staying informed and analytical.
Honda's EV Ambitions
Honda's unveiling of new EV concepts at CES indicates a push towards autonomous driving technology. While ambitious, these developments are watched closely, considering the challenges of achieving truly autonomous driving.
Conclusion
Moody's addition to the portfolio exemplifies a strategic investment approach focused on quality, growth potential, and sustainability. Its established position in the credit rating industry, combined with the promising outlook of Moody's Analytics, underscores its potential as a compounding machine. As we navigate through market uncertainties, investments in such robust companies could be key to achieving long-term financial success.
For more insights and analysis, check out the full episode here.
