Why Moats Matter (PDF)

Incorporate economic moat analysis for profitable investing

Why Moats Matter is a comprehensive guide to finding
great companies with economic moats, or competitive advantages.
This book explains the investment approach used by Morningstar,
Inc., and includes a free trial to Morningstar's Research.

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.

Morningstar views investing in the most fundamental sense: For
Morningstar, investing is about holding shares in great businesses
for long periods of time. How can investors 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 source is explored in depth throughout this
book.

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.

The book 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 this book, 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.