Saturday, April 04, 2015

Morningstar's moats

What is the difference between a wide moat and a narrow moat?

Morningstar assigns an economic moat rating based on the degree to which a company has sustainable competitive advantages. All of the nearly 1,500 companies covered by Morningstar's equity analysts receive a moat rating of wide, narrow, or no moat based on the degree to which these competitive advantages are present. (Sources of economic moat include intangible assets, switching costs, and network effect, as described in this document and this video.)

The distinction between companies with wide and narrow economic moats is one of duration rather than degree and is arguably less important than the distinction between those with moats and those without them. According to the methodology Morningstar uses to calculate moats (described in this paper), companies with wide moats are expected to earn excess returns on capital for at least 20 years, while those with narrow moats are expected to do so for at least 15 years. Or, to put it another way, a wide-moat company's sustainable competitive advantages are projected to last longer than those of a narrow-moat company.

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