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So good that any idiot can run it

This year’s best investment to date is Moody’s; its share has risen about 40 percent since the start of the year. I thought I would talk a little more about this company and why we own its shares.

Moody’s has a simple business: it sells credit ratings. If a company wants to borrow money by issuing bonds, Moody’s assesses its creditworthiness. This assessment leads to a rating that affects how much interest the company has to pay for its debt.

Peter Lynch, one of the world’s most successful investors, used to say, “Invest in a business that is so good that any idiot can run it; because sooner or later one will”. I see Moody’s as just one such company. Moody’s and S&P together hold 80 percent of the market. They are embedded in the financial system to such an extent that most financial authorities require banks and insurers to only buy bonds with a credit rating. This means that a company that wants to borrow money has to buy a credit rating from either Moody’s or S&P. However, there is also an upside; in exchange for paying a few hundredths of a percent in charges they often get lower interest rates and a larger market to sell their bonds to.

I think the company’s future is bright. Firstly, debt volumes are rising as the economy grows (although the proportions can rise or fall over both the short term and the long term), and secondly, an increasing proportion of lending is taking place outside the banks (which increases the need for Moody’s services). But more importantly, Moody’s strong position means that it can raise its prices by a percent or so every year. And, due to its fixed costs, a two percent price increase gives almost a five percent gain in profits. In addition, its business requires no capital so it can distribute all profits to its shareholders.

I have followed Moody’s for several years, and the fund has even owned stock in the company before. The last time we owned it, we sold following a rapid 40 percent gain. I will not make that mistake again. Companies of this quality are worth holding on to.

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