Moody's

# Moody's **Moody's** is one of Berkshire Hathaway's most profitable investments, demonstrating the extraordinary returns available from businesses with natural monopolies. ## The Investment Berkshire began accumulating Moody's stock in 2000, when the company was spun off from Dun & Bradstreet. By 2004, Berkshire owned approximately 16% of Moody's, making it one of our largest equity holdings. > "Moody's is a natural oligopoly with minimal capital requirements and extraordinary returns." The investment has been extraordinarily successful. Moody's generates high returns on capital, requires minimal reinvestment, and benefits from significant barriers to entry. ## The Competitive Advantage Moody's moat comes from its position as one of only three major credit rating agencies (along with S&P and Fitch). This oligopoly is reinforced by: ### Regulatory Requirements Many institutional investors are required by regulation to hold securities rated by "Nationally Recognized Statistical Rating Organizations" (NRSROs). This creates a captive market for the major rating agencies. ### Reputation and Track Record Moody's has been rating bonds for over a century. This long history creates credibility that new entrants cannot easily replicate. ### Network Effects Issuers want their bonds rated by agencies that investors trust. Investors trust agencies that have rated many bonds. This creates a virtuous cycle. ## The Business Model Moody's rates debt securities for a fee. The business has several attractive characteristics: - **Minimal capital requirements** — Rating bonds requires intellectual capital, not physical capital - **High margins** — Once the rating infrastructure is built, incremental ratings are highly profitable - **Recurring revenue** — Bonds require ongoing surveillance, generating recurring fees - **Pricing power** — Issuers have limited alternatives to the major agencies ## The Controversy Moody's has faced criticism for its role in the 2008 financial crisis. The company rated many mortgage-backed securities AAA that later defaulted. Buffett has acknowledged this failure but notes that Moody's business model remains intact. The regulatory requirement for ratings has not changed, and Moody's continues to dominate the industry. ## Why It Fits Buffett's Criteria 1. **Simple business** — Rating bonds is easy to understand 2. **Durable moat** — Regulatory barriers and reputation create lasting advantages 3. **Minimal capital needs** — The business generates free cash flow 4. **Excellent returns** — Return on equity exceeds 100% ## Conclusion Moody's demonstrates that businesses with natural monopolies can generate extraordinary returns. Despite the controversy surrounding its role in the financial crisis, the company's competitive position remains strong.