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Why Moats Matter: The Morningstar Approach to Stock Investing Hardcover – July 21, 2014


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Why Moats Matter: The Morningstar Approach to Stock Investing + The Education of a Value Investor: My Transformative Quest for Wealth, Wisdom, and Enlightenment + Business Adventures: Twelve Classic Tales from the World of Wall Street
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Product Details

  • Hardcover: 240 pages
  • Publisher: Wiley; 1 edition (July 21, 2014)
  • Language: English
  • ISBN-10: 1118760239
  • ISBN-13: 978-1118760239
  • Product Dimensions: 6.3 x 0.9 x 9.3 inches
  • Shipping Weight: 14.9 ounces (View shipping rates and policies)
  • Average Customer Review: 4.4 out of 5 stars  See all reviews (11 customer reviews)
  • Amazon Best Sellers Rank: #25,002 in Books (See Top 100 in Books)

Editorial Reviews

From the Inside Flap

Just as physical moats protect castles from enemies, 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.

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 advantage—cost advantage, intangible assets, switching costs, efficient scale, and network effect—each 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

From the Back Cover

"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


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Customer Reviews

I am not surprised that there is no relationship between moats and returns.
Jackal
Great book, it really expanded on Pat Dorsey's book by adding checklists and key questions to ask to identify competitive advantages.
Marc
This book delves into the details of why good companies make good long term investments.
MFSI

Most Helpful Customer Reviews

10 of 10 people found the following review helpful By investingbythebooks on August 25, 2014
Format: Hardcover
In a capitalistic economy with free market entry new competition will ensure that any existing company’s surplus financial returns will evaporate over time. That is, unless there is something that interferes and protects the incumbents from new competition. Few have spent more time thinking of sustainable incumbent competitive advantages – or moats in Warren Buffett’s parlor – than the independent investment research firm Morningstar. In fact the firm has built its entire research process around the two building blocks moats and margin of safety. The credited authors are co-CEO of Morningstar Australasia and Director of Equity Research in North America respectively, but a large number of Morningstar staff have contributed to the book.

Why Moats Matter implicitly has two parts. The first is a detailed run through of Morningstar’s equity research methodology – complete with an ending quantative back test showing that their undervalued stocks in companies with wide moats generate excess returns. The second is a one-by-one description of the moat in a number of industries. The authors’ stated goal is to provide the reader with the means to determine a company’s moat and margin of safety, to use in his own investment decision-making. Perhaps the less clearly stated goal is to advertise the merits of Morningstar’s research? Sell side equity research is a tough business and it’s not easy to compete with the Goldman Sachses of this world. The structure of the book certainly opens up for the risk that it becomes a (lengthy) promotional leaflet.

As I like Morningstar’s approach I might be biased, but I don’t think that the book crosses the “ad-brochure-line”. Also, even if it doesn’t exactly sparkle it’s not as dry as you might expect of a book on research methodology.
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4 of 4 people found the following review helpful By Douknowme on September 24, 2014
Format: Hardcover Verified Purchase
This is an excellent book that shows a well researched method to evaluate companies that are located on various stock market exchanges. Wide Moat investing is seeking those companies that have various competitive advantages over other companies in similar areas of manufacturing, etc.
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10 of 13 people found the following review helpful By Marc on July 28, 2014
Format: Kindle Edition Verified Purchase
Great book, it really expanded on Pat Dorsey's book by adding checklists and key questions to ask to identify competitive advantages. The industry sections at the back are a great primer for key aspects of business models.
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3 of 3 people found the following review helpful By MFSI on September 8, 2014
Format: Kindle Edition Verified Purchase
This book delves into the details of why good companies make good long term investments. It gives the intelligent investor the tools needed to make sounds investments decisions, not just the hot pick of the day
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1 of 1 people found the following review helpful By D. Jensen on November 21, 2014
Format: Kindle Edition
Forget this book and just get Pat Dorsey's The Five Rules for Successful Investing. That book covers more than just 5 topics, makes complex investing topics simple and lays out how you can do all the analysis yourself. This Why Moats Matter is just a shadow of the 5 Rules book. I think since Dorsey is no longer with Morningstar, the company wanted a new book put out. One of my issues with this Why Moats Matter book is that it seems to be a big book explaining a little about how they do their research. Or to be more cynical, an advertisement for their product that you pay for. You can get a simple description of how they look at stocks on their website for free. This book is not bad, thus the 3 stars, but if you have ANY investment knowledge you will not come away with anything new. The Dorsey book covers everything this book attempts to cover, but Dorsey does a much more complete job. He covers in more depth the concepts of this book, he explains the concepts for laymen to understand, he shows you how to use the concepts including all calculations, he gives examples of how to use the information to do research on actual companies, and he gives more details on the various investment sectors than this Why Moats Matter. If you have to see for yourself, go to the library or bookstore and look at them side by side. Or try the Look Inside feature on Amazon and compare.
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11 of 16 people found the following review helpful By Jackal on August 28, 2014
Format: Hardcover Verified Purchase
We are seeing more and more investment books deal with competitive advantage as opposed to just the financial statements. This book gives an overview of Morningstar's approach. The authors describe five sources of competitive advantage. In their terminology "moats" (homage to or free-ride on Warren Buffett). The methodology comes across as quite primitive, if you have knowledge of strategic management. Still I applaud the direction towards assessment of competitive advantage. If you are interested in this approach my recommendation is Competition Demystified: A Radically Simplified Approach to Business Strategy.

In the chapter evaluating the methodology, they find no difference between moat stocks and non-moat stocks after one month!!!! However, moat stock have less variability in returns. The authors provide no information on longer time horizons than a month. My suspicion is that their methodology does not work. The chapter on evaluation is awful, because the methodology is so primitive. The moat strategy has probably been designed using past performance data. It is then not acceptable to use the same historical time period for evaluating the the strategy. I will not say more. No data provided on individual moats.

I am not surprised that there is no relationship between moats and returns. The methodology is simply too primitive. Check out the reference provided above for a deeper understanding. The authors should have thought about moat interactions, additional moats, and even competitors. I thought that the book would contain a dumbed-down version of the Morningstar methodology. True, to a large extent the book is marketing.
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