Even if you think yourself is a veteran fundamental investor, you could still learn a few new things from this book, which focuses on the concept of moat for great businesses. Warren Buffett once said in a famous 1999 Fortune article – “The key to investing is…determining the competitive advantage of any given company and above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors”.
Why Moats Matter is all about Morningstar taking this concept a step further and developed a comprehensive moat-based analytic framework that can be applied consistently across a broad, global list of companies.
The Morningstar team, over the years of studying companies, have refined this framework and came to a conclusion of the 5 major sources of moat, aka competitive advantage. These 5 aspects are explored in depth with chapter on its own, taking global companies as case studies:
- Intangible assets
- Cost advantages
- Switching costs
- Network effect
- Efficient scale
Another topic which is less explored in fundamental investing is a qualitative aspect in the form stewardship. In today’s economy, prudent capital allocation is more important than ever. Morningstar team shared in depth its stewardship methodology in evaluating companies – analyzing how effectively a company’s management team allocates its capital to maximize return to shareholders. A chapter that caught my attention when questions such as these are asked with regard to stewardship:
- Is it the kind of growth that is value-enhancing & moat-widening instead of boosting short term results to the detriment of long term value?
- Has the company strayed from its core competencies in its pursuit of growth?
- How consistent and transparent is the dividend & share-buyback policies?
- Is the management team being compensated disproportionately?
Last but not least, the Morning Rating (TM) for stocks chapter is refreshing in a sense that it takes into account a metric called “valuation uncertainty”. This metric asks – “How likely is it that I am wrong in my estimates of the intrinsic value of the stocks in analysis?”. As you might expect, the margin of safety (MoS) would increases when valuation predictability decreases.
The last few chapters go in depth in some popular sectors and analyzes their moat ratings – really good insights into how analysts look at sectors such as consumer, basic materials, energy, financial services, healthcare, technology and utilities.
Highly recommended for every investor!
If you post a comment below on why you think moat matters in investing, I’ll arrange to send a copy of the book, sponsored by Wiley Singapore. 2 copies are available for the best comments.
Update 27 Nov ’14: Winner for this round are Aden and SG Yon
It gives you a blueprint, a strategy and the road map of a company that you are about to invest in as a long term investor.
Moats Matter because:
1. Selection of quality stock for company within similar industry can be done base on wide moats, structured approach comes handy.
2. All kinds of stocks can be evaluated accurately, all kinds of industries can be studied and compared to shortlist.
3. The selection of stock would be based on strong value within company that would not be swayed by any storm, it is reliable.
4. They are the core of the company that steer the company’s direction and competitiveness that allow the company to continue thriving, thus an evergreen investment.
5. Risk is greatly reduced, it is almost a 100% guaranteed gain.
6. It is a wholistic approach.
It’s the qualitative information that supports the fundamental investing approach. It’s also the intangible information that allows one to compare one business against another to identify which business is superior in strength to invest in. A stock chosen without moat, i.e. purely based on financial statement analysis is as good as a ‘half-past-six’ stock selection.
from CF’s book summary, we can know that the greater’s economic moats of a company, the higher confidence level it will give to value investors when they do their first level stock screening process before dive into companies’ financial statement. As we know, investing is a kind of art which mean price of a company on particular day is just reflection of emotion and of current buyers and current sellers. By greatly understand company moats together with our valuation on the company, we will definitely won’t scare off when big correction but instead maybe we can bottom fish good companies at discount value.
Moat does matter as business with a good profit tend to attract competition because nobody likes bad business and want to have a slice of the cake. To make it harder for competitors to gain market share, the company needs to protects its profit by building a wide economic moat that result of many years of hard work. Else, it will be prone to be attacked and losing out eventually.
In addition, it’s impossible to estimate the future cash flows and earnings of a company if the company does not has a moat. The predictability is not there and it will be hard to calculate the intrinsic value of the company.
It will be nice if one able to buy a company with wide economic moat at high margin of safety. Knowing that the company has a sustainable competitive edge over its competitors and keep on enhancing shareholders’ value in the long run will keep the investor sleep well at night. Investing is just that simple.
Moats matter because they are the analogy to the forces that hold back competitors. The larger the moat the longer the duration that competitors are held at bay…
Professor Michael Porter is his 1979 paper – “How Competitive Forces Shape Strategy” mentions Five Forces that a company will face:
1. Threat of new entrants
2. Threat of substitute products or services
3. Bargaining power of customers (buyers)
4. Bargaining power of suppliers
5. Intensity of competitive rivalry
So it is important to understand that threats and challenges to a company’s profitability and longetivity do not just come from current competitors or new entrants but also from consumers/customer’s ability to switch as well as the bargaining power of suppliers to that company/industry.
Moats are important to differentiate from the great, good and the bad. It can be used as a benchmark for analysis on companies from different sectors. This can be used for identifying emerging start-up which could possibly become the next big name in the future.
Hi,
Moat do matter because it was used to differentiate the company from its competitors. After all, the wider the moat, the larger and more sustainable the competitive advantage. Thus, a company with a wide moat possesses characteristics that act as barriers against its competitors because it already had a well-known brand name, pricing power and a large portion of market demand,
It is as important as in margin of safety that was decribed cause it will determine how your portfolio able perform well and serve its purpose to growth itself
Hi,
Moat matter because people like Warren Buffet care/breath/talk about it, he’s a billionaire and we should care too, if we want to emulate his success.*kidding2x*
other than that, the reason it matter most is to differentiate it from competition, just like how Apple did. See how successful it has become.