6 Key Lessons in Stock Investing Explained

From economic moats to share price fair value to stewardship, here we explain the key pillars of Morningstar equity analysts approach to investing in equities

Matthew Coffina, CFA 6 November, 2014 | 2:55PM
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Periodically, it’s important to review the basics of our investment philosophy, both for investors who are new to Morningstar and for long-time followers who could use a refresher. We use a particular vocabulary at Morningstar, and in this article we’ll explain what we mean by economic moats, moat trends, stewardship, and so on.

Economic Moats 

A company with a very profitable business is like a castle that is constantly under attack by competitors. Without a strong defence, competitors will soon imitate the company’s products, charge lower prices, steal market share, and erode profit margins to the point where the business is merely average, at best.

Economic moats — a term Morningstar borrowed from Warren Buffett — are what keep competitors at bay. An economic moat is a sustainable competitive advantage that allows a company to earn excess returns on capital (that is, returns on invested capital greater than the cost of capital) for a very long time. We define a wide moat as a competitive advantage that is almost certain to last at least 10 years, and probably 20 years or more. The standard for a narrow moat is lower—it only needs to be more likely than not that the competitive advantage will last for 10 years.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Matthew Coffina, CFA  is a stock analyst at Morningstar.

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