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
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 itthe foundation of a successful stock-investing philosophy. AtMorningstar, 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 affordsvirtually 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 valuerelative 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 Iidentify 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.
“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