Identifying ‘economic moats’, or structural barriers that protect companies from competition, is the cornerstone of Morningstar’s equity analysis. In the same way that castles are protected by moats, companies with economic moats are great businesses that can fend off competition and earn high returns on capital for many years. Morningstar’s new book, Why Moats Matter: The Morningstar Approach to Stock Investing (Wiley: ISBN: 978-1-118-76023-9), helps investors find superior businesses and determine when to buy them to maximise returns over the long term.
Why Moats Matter outlines the basic idea of economic moats, a concept pioneered by Warren Buffett, and gives investors a fundamentals-based framework for successful long-term equity investing. Why Moats Matter is co-authored by Heather Brilliant, Co-Chief Executive Officer of Morningstar Australasia and recently Global Head of Equity and Corporate Credit Research for Morningstar, and Elizabeth Collins, Morningstar’s Director of Equity Research, North America. Other members of Morningstar’s equity and corporate credit and quantitative research teams also contributed to the book.
“When Morningstar started analysing stocks, we began with some core principles that guide our research to this day. Then and now, our work has centred on three primary elements – sustainable competitive advantages, valuation, and margin of safety – that we believe are the keys to outperforming the sharemarket over time,” Brilliant said. “Why Moats Matter delves into each of these ideas and is intended for investors with a long-term perspective. When you focus on a company’s fundamental value relative to its share price, and not on where the price is today relative to a month ago or a day ago or five minutes ago, you start to think like an owner rather than a trader. It’s this mindset that we believe is key to helping people become successful sharemarket investors.”
In Why Moats Matter, Morningstar’s experts:
- explain the concept of economic moats and moat trends and the five sources of sustainable competitive advantage – Intangible Assets, Switching Costs, Network Effect, Cost Advantage, and Efficient Scale
- establish the difference between business quality and undervalued stocks
- discuss standards for evaluating moats by sector and industry
- clarify how moats affect stock returns and stock valuation
- offer portfolio strategies for putting the power of moats and valuation to work.
