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By Jason Stipp | 06-11-2010 12:32 PM

Larson on Risk Relievers for Your Stock Portfolio

How Morningstar's Paul Larson uses moat ratings, fair value discounts, opportunistic- and confidence-driven position sizing, and a healthy dose patience to control risk in the StockInvestor portfolios.

Jason Stipp: I'm Jason Stipp for Morningstar, and it's Risk Control Week on Morningstar.com. We're talking about the different types of stock risk that investors have to deal with today and I'm pleased to be joined by Morningstar's Paul Larson. He is Editor of the Morningstar StockInvestor and an equity strategist with us.

Thanks for joining me, Paul.

Paul Larson: Thanks for having me.

Stipp: So the first question for you, there's all sorts of different risks that you can talk about as it pertains to stocks, but I think the primary one, the one that people tend to think about first is operational risk. How risky is this business that you are investing in?

One of the ways that you look at this is the economic moat rating at Morningstar, and we talk about wide-moat stocks having these competitive advantages. What does that mean in terms of risk? Why is a wide-moat stock maybe less risky?

Larson: Well, when a company has competitive advantage that gives it a wide economic moat, that means that it is protected from competitors, and it has some sort of characteristic that is going to allow it to have those positive economic profits, those returns on invested capital that are in excess of its cost of capital.

And I think that having that competitive advantage protects the business, gives it something that it can hang on to, where if it has competitors that don't necessarily have that competitive advantage, don't have an edge, they are much more exposed to the broader economic situation.

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