Steve Jordon, Omaha.com excerpt followed by more on the book
Financial research company Morningstar has built an investment philosophy and published a new book around a concept that Warren Buffett embraced more than 20 years ago.
Heather Brilliant and Elizabeth Collins wrote and compiled the book, “Why Moats Matter,” along with other Morningstar staffers, citing Buffett’s metaphor of what makes companies successful in the long term.
The book quotes a 1999 Fortune magazine article by Buffett that said, “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.”
Our earliest description of Buffett’s “moat” philosophy came from his 1993 appearance at a Columbia University investment class taught by Bruce Greenwald, who asked how an investor could understand a company well enough to invest in it.
“I would just put myself in the frame of mind that I had just inherited that company, and it was the only asset my company was ever going to own,” Buffett replied. “What would I do with it? What am I thinking about? What am I worried about? Who are my competitors? Who are my customers? Go talk to them. Find out the strengths and weaknesses of this particular company vs. other ones. ...
See full article on Warren Buffett's Investment By Moat Strategy Gets A Book by Steve Jordon, Omaha.com
Why Moats Matter: The Morningstar Approach to Stock Investing by Heather Brilliant, Elizabeth Collins
Why Moats Matter - Description
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.
Why Moats Matter 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 Why Moats Matter, 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.
Why Moats Matter - Review
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