Invest in banking like Warren Buffett: Own a ‘castle’

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Subscribe to enjoy similar stories. Warren Buffett has said he looks for businesses that are like castles, protected by moats. Some of today’s best moats aren’t filled with sharks, though—they are packed with data and analysis.

Buffett’s Berkshire Hathaway has recently been scaling back its investment in Bank of America. Some view that as part of a shift toward a more defensive, cash-heavy stance. One position at Berkshire that hasn’t changed this year: a stake in Moody’s, valued at more than $12 billion at the current share price.

Moody’s might be a familiar name to many investors because of credit ratings. But, like S&P Global, it has long been diversified well beyond that into many businesses and products that supply or analyze financial data. These businesses provide banks, investors, insurers and others with the tools for highly specialized and highly regulated tasks.

Along with companies such as FactSet Research Systems, MSCI, Equifax, Experian and TransUnion, financial information-services stocks tend to trade at much higher valuations than the lenders or investment managers that rely on them. Generally, they can benefit from having proprietary data, or ways of analyzing data, and supplying benchmarks that everyone must use. They can enjoy high-margin or recurring revenue, such as software subscriptions.

In other words, a profitable moat. One standout in this realm right now is Fair Isaac Corp., often known by its ticker symbol and flagship product, the FICO score. Fair Isaac doesn’t supply credit data itself, but by employing data from credit bureaus or its clients, it produces scoring and analysis that its clients use to make underwriting and other decisions about customers.