Identifying “economic moats,” or structural barriers that protect companies from competition, is the cornerstone of Morningstar’s equity analysis. Similar to the 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 stocks and determine when to buy them to maximize 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 stocks investing. The book is co-authored by Heather Brilliant, recently named co-chief executive officer of Morningstar Australasia, and previously 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.
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.
“When Morningstar started analysing stocks more than a decade ago, we began with some core principles that guide our research to this day. Then and now, our analytic work has centred on three primary elements—sustainable competitive advantages, valuation, and margin of safety—that we believe are the keys to outperforming the stock market 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 stock price, and not on where the stock 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 successful stock investing.”
Why Moats Matter (ISBN: 978-1-118-76023-9; £26.99; Hardcover) is now available wherever books and e-books are sold. More information about Why Moats Matter, including author biographies and headshots, cover art, and methodology documents, is available at http://global.morningstar.com/whymoatsmatterPR. To view a video about economic moats, please visit: Video Report: About Economic Moats. Morningstar applies its wide-moat philosophy in its Morningstar® Wide Moat Focus IndexSM, which consists of 20 stocks that represent the most compelling values as determined by the ratio of Morningstar’s estimated fair value to the stock’s current market price.
Morningstar has 120 equity analysts covering companies of interest to investors worldwide. The team covers approximately 1,500 stocks including approximately 250 listed on the European exchanges.