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