A couple of clear trends emerge from this data. The first is that we're pretty darned good at picking wide-moat stocks--the wide-moats in the Buy at 5 Stars, Sell at 1 Star portfolio have outperformed our wide-moat coverage universe in all trailing periods, and in every calendar year but one. This conclusion is also supported by the performance of our Wide Moat Focus Index (WMW), which consists of the 20 cheapest wide-moat stocks. The Wide Moat Focus Index was off only about 5% in the first half of 2008--compared with a 12% loss for the market--and it has posted returns of about 11% annually over the past five years.
The second trend is that we have not been very good at separating winners from losers among the no-moat companies that we cover. Our performance in this area leaves much to be desired, and (so far) 2008 is the first year in which our no-moat 5-star stocks have outperformed our no-moat stocks as a group. Narrow moats are a toss-up--we have added value over some time frames, but not overall.
We've thought a lot about the causes for this divergent performance, and while it's a complex issue, I think a lot of it boils down to the simple fact that no-moat companies are more difficult to forecast and value. They're more volatile, they often have weaker balance sheets, and they are more frequently affected by tough-to-forecast external factors like commodity prices.
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