Synopses & Reviews
Just as physical moats protect castles from enemies, economic moatsor sustainable competitive advantagesprotect companies from competitors. Legendary investor Warren Buffett devised the economic moat concept. Morningstar has made it the foundation of a successful stock-investing philosophy.
At Morningstar, we've always viewed investing in the most fundamental sense: We want to hold shares in great businesses for long periods of time. How can you tell a great business from a poor one? A great business can fend off competition and earn high returns on capital for many years to come. The key to finding these great companies is identifying economic moats that stem from at least one of five sources of competitive advantagecost advantage, intangible assets, switching costs, efficient scale, and network effecteach of which we explore in great depth.
Even better than finding a great business is finding one at a great price. The stock market affords virtually unlimited opportunities to track prices and buy or sell securities at any hour of the day or night. But looking past that noise and understanding the value of a business' underlying cash flows is the key to successful long-term investing. When you focus on a company's fundamental value relative to its stock price, and not where the stock price sits today versus a month ago, a day ago, or five minutes ago, you start to think like an owner, not a trader. And thinking like an owner will make you a better investor.
As you've probably guessed, this book won't tell you how to get rich quick by juggling stocks. What it will give you is a fundamental framework for successful long-term investing. The book will help you answer two key questions: How can I identify a great business, and when should I buy that business to maximize my return? If you get these two things right more often than not, you're well on your way to investing success.
Ours is not the only valid method for investing in stocks, but it's one that has worked well over the years. Using fundamental moat and valuation analysis has led to superior risk-adjusted returns and made Morningstar analysts some of the industry's top stock-pickers. In this book, we share all the ins and outs of our moat-driven investment philosophy, which you can use to identify great stock picks for your own portfolio.
To find out more about Morningstar's approach to stock investing and receive a free trial of our research, visit: www.global.morningstar.com/whymoatsmatter
Synopsis
Economic moats, referring to the advantages a company has over its competitors, are competitive structures that help great companies continue to be great investments. Stock in a company with a wide economic moat is usually a much safer investment.This book will:
- Introduce Morningstar's approach to investing
- Establish the difference between business quality and undervalued stocks
- Explain economic moat and its network effect, cost benefits, and efficient scales
- Discuss industry standards for determining moats
- Help determine what moat means for stock returns and their impact on stock valuation
Synopsis
Incorporate economic moat analysis for profitable investing Why Moats Matter is a comprehensive guide to finding great companies with economic moats, or competitive advantages. This book explains the investment approach used by Morningstar, Inc., and includes a free trial to Morningstar's Research.
Economic moats--or sustainable competitive advantages--protect companies from competitors. Legendary investor Warren Buffett devised the economic moat concept. Morningstar has made it the foundation of a successful stock-investing philosophy.
Morningstar views investing in the most fundamental sense: For Morningstar, investing is about holding shares in great businesses for long periods of time. How can investors tell a great business from a poor one? A great business can fend off competition and earn high returns on capital for many years to come. The key to finding these great companies is identifying economic moats that stem from at least one of five sources of competitive advantage--cost advantage, intangible assets, switching costs, efficient scale, and network effect. Each source is explored in depth throughout this book.
Even better than finding a great business is finding one at a great price. The stock market affords virtually unlimited opportunities to track prices and buy or sell securities at any hour of the day or night. But looking past that noise and understanding the value of a business's underlying cash flows is the key to successful long-term investing. When investors focus on a company's fundamental value relative to its stock price, and not where the stock price sits today versus a month ago, a day ago, or five minutes ago, investors start to think like owners, not traders. And thinking like an owner will makes readers better investors.
The book provides a fundamental framework for successful long-term investing. The book helps investors answer two key questions: How can investors identify a great business, and when should investors buy that business to maximize return?
Using fundamental moat and valuation analysis has led to superior risk-adjusted returns and made Morningstar analysts some of the industry's top stock-pickers. In this book, Morningstar shares the ins and outs of its moat-driven investment philosophy, which readers can use to identify great stock picks for their own portfolios.
Synopsis
Finding great businesses at great prices is the holy grail of investing. How can you tell a great business from a poor one? A great business is one that can fend off competition and earn high returns on capital for many years to come. Such companies have economic moats—structural advantages that protect them from competitors, just as physical moats protected castles from enemies. Even better than finding a great business is finding one at a great price.
This book will:
- Introduce Morningstar's approach to stock investing
- Explain the concept of economic moats 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 industry standards for evaluating moats
- Help determine how moats affect stock returns and stock valuation
Synopsis
"The search for the enduring economic moat is the holy grail of value investing. These modern-day protected business castles allow their owners to earn high returns on capital, the ultimate goal for any long-term investor. In
Why Moats Matter, Heather Brilliant and Elizabeth Collins provide a wonderfully detailed map to help both small and large investors find these great companies."
John W. Rogers Jr., founder, chairman, and chief investment officer, Ariel Investments
"Morningstar's Economic Moat framework is a useful complement to Michael Porter's five forces model, as it approaches the issue of franchise quality from an investor's perspective. Armed with Morningstar's moat framework, I've been able to make better assessments of companies' competitive positions, which is a critical element of my stock-picking process."
Michael Luciano, investment analyst and U.K. pilot fund manager, Fidelity Worldwide Investment
About the Author
Heather Brilliant, CFA, is co-chief executive officer of Morningstar Australasia. Before assuming this role in 2014, Brilliant was global director of equity and corporate credit research for seven years. In this role, she led Morningstar’s global equity and corporate credit research teams, consisting of more than 120 analysts, strategists, and directors. She also served on Morningstar's Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all of the firm's Economic Moat and Moat Trend ratings. Before joining Morningstar in 2003 as an equity analyst, Brilliant spent several years as an equity research analyst for boutique investment firms. She has covered a variety of sectors, including pharmaceuticals, biotechnology, business services, and retail. She started her finance career at Bank of America as a corporate finance analyst, covering the auto industry. Brilliant holds a bachelor’s degree in economics from Northwestern University and a master's degree in business administration from the University of Chicago Booth School of Business. She also holds the Chartered Financial Analyst® designation. Brilliant is a member of the CFA Institute Board of Governors and is a past chairman of the CFA Society of Chicago.
Elizabeth Collins, CFA, is director of equity research, North America for Morningstar, responsible for leading the firm's team of North American-based equity research analysts. Before assuming her current role in 2014, Collins was chair of Morningstar’s Economic Moat committee, a group of senior members of the equity research team responsible for reviewing all Economic Moat and Moat Trend ratings issued by Morningstar. She was also director of basic materials equity research, where she oversaw coverage of companies in the agriculture, building materials, chemicals, coal, forest products, metals and mining, packaging, and steel industries. Prior to leading the basic materials team, Collins was a senior analyst on the energy team. She joined Morningstar in 2005. Collins holds a bachelor's degree in psychology from Boston College and a master’s degree in business administration from DePaulUniversity. She also holds the Chartered Financial Analyst® designation.
Table of Contents
Preface
Chapter One: Guiding Principles of Morningstar’s Equity Research
Question 1: How can we identify which businesses are great?
Question 2: When is the best time to invest in great businesses?
Chapter Two: What Makes a Moat?
Moat Sources
Notes
Chapter Three: Why Moat Trends Matter
Contributed by Stephen Ellis, a member of Morningstar’s Economic Moat Committee and head of Financial Services equity research at Morningstar
Moat Trends and Fundamental Performance
Five Key Considerations for Moat Trends
Intangibles
CostAdvantage
Switching Costs
Network Effect
Efficient Scale
Best Practices for Moat Trend Analysis
Chapter Four: How Stewardship Affects Economic Moats
Contributed by Todd Wenning, who oversees Morningstar’s equity stewardship methodology
Meet Our Stewardship Methodology
Drilling Down
Chapter Five: Applying Moats to Dividend Investing
Contributed by Josh Peters, Chief Equity Income Strategist for Morningstar and editor of the Morningstar DividendInvestor newsletter
Why Dividends Matter
Which Dividends?
Chapter Six: The Importance of Valuation
Contributed by Joel Bloomer, Matt Coffina, and Gareth James, members of Morningstar’s Moat Committee and contributors to Morningstar’s valuation methodology.
Valuation Concepts
Cost of Capital and Returns on Capital
Morningstar’s Valuation Approach
Example: Calculating ROIC
Forecasting Future Free Cash Flows
The Morningstar Rating for Stocks
Fair Value Uncertainty and Cost of Equity
Notes
Chapter Seven: Do Moat Ratings Predict Stock Returns?
Contributed by Warren Miller, Head of Quantitative Research at Morningstar
Chapter Eight: Putting Moat and Valuation to Work: Portfolio Strategies
Wide Moat Focus Index
The Tortoise and Hare Portfolios
Chapter Nine: Basic Materials
Commodity Manufacturers
Commodity Processors
Metals and Mining
Chapter Ten: Consumer
Beverages
Consumer Defensive—Consumer Products
Tobacco
Restaurants
Retail Defensive
Specialty Retail
Lodging
Notes
Chapter Eleven: Energy
Oil and Gas Drilling
Oil and Gas Exploration and Production
Oil and Gas Midstream
Refining
Oil & Gas Integrateds
Engineering Services
Chapter Twelve: Financial Services
Banks
Capital Markets
Credit Services
Financial Exchanges
Insurance
Chapter Thirteen: Healthcare
Pharmaceuticals
Biotechnology
Medical Devices
Medical Instruments and Supplies
Diagnostics and Research
Chapter Fourteen: Industrials
Railroads
Airport Operators
Aerospace and Defense
Truking and Marine Shipping
Waste Management
Heavy Equipment
Diversified Industrials
Chapter Fifteen: Technology
Consumer Technology
Enterprise Hardware Systems
IT Services
Semiconductors
Software
Telecom Services
Chapter Sixteen: Utilities
Regulated and Diversified Utilities
Independent Power Producers
About Morningstar
Index