Expenditure on Moat expansion

What's the issue: About Maintenancec Capex. More specifically whether expenditur
e on the EXPANSION of moats can be regarded an INVESTMENT or they are simply Mai
ntenance Capex. In annual reporting of the companies, any such expenditure is of
ten expensed off, thereby creates under-reporting of economic profits.
Any such expenditure can be qualified as investment if this expenditure gets con
verted into value, namely by increase in sales/potential sales, profits (price a
dvantage or cost reduction). Buffet was mentioned saying the words 'profit less
growth' in the book - The Essays of Warren Buffett: Lessons for Corporate Americ
a. So if growth without profit is a possibility. Any assumption that growth will
be folled by profit is a fallcy. An investor has no way to see if it is getting
converted into value anhy before than the actual results. Any efforts to increa
se in moats will not immediately get converted into value. Expenditure may be in
spurts initally, then there will be a deafening silence and then, if everything
goes as assumed, a stream of continuous flow of success.
Risk is there if it will not get converted. Capital loss, a reputational risk (m
ay damage the moat!) and opportunity loss - not only for the company but for the
investors. Boom and Doom! How should then an investor hedge herself from this?
As Philip Fischer said, timing matters in case investor wants to be optimistic
because of the new process/development. How to time it - Identify if there emerg
es a pattern of a possible cause (increase in such expenditure) and effect (incr
ease in value). As Prof Bakshi said in a tweet (today i guess!) "How should you
notice change? By looking specifically for evidence of change or looking at aggr
egate data?" and again more explicitly "You recognise patterns by finding someth
ing odd (a clean platform).Then you find 15 others & u ask Why? Who?." You have
to discernible and grab the pattern early.
Any such expenditure is not a one-time expenditure but a continuous one. It, the
reby, requires a steady stream on attention and resources. If stopped abruptly t
he previous efforts and resources are all but wasted. It may create a funding pr
oblem. So better plann on capital allocation. (On a second thought, expansion ex
penditure on moats is also a capital allocation decision). Also, it may require
collateral expenditure. As Buffet wrote in the letter "as long as we can concurr
ently build the infrastructure the company needs". It may exceed initial expendi
ture. So, if a CEO intends to increase in moats, she needs to be mindful of the
increase in outflow of cash (unexpected) in the near future on the associated ac
tivities. This may be a problem for CEOs but provides a good opportunity for inv
estors to identify the pattern. Because some of the associated expenditure may f
low to CWIP or PPE - CAPEX.
Am i right in saying any maintenance capex that has potential to create intangib
le assets (which are not captured in Balance sheet) will eventually require CAPE
X? Professor your inputs are required here!
As for the question on how to differentiate between Maintenance Capex and Growth
Capex. I believe instead of concentrating on the differentiation, focus more on
the value creation from such expenditure. By the way why all the efforts on mai
ntenance capex, if it will not be followed by growth capex. Maintaining sales sh
ould not and i guess never is the objective of business. It is VALUE CREATION.
ONE SENTENCE that aptly sumarrises the whole edifice - from 1998 letter Snapshot
: We simply measure whether we are creating more than a dollar of value per doll
ar spent
and if that calculation is favorable, the more dollars we spend the hap
pier I am.