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Stock Strategist

Dig a Moat for Your Investments

Ruminations on enhancing and sustaining returns.

Economic moats--factors that enable and sustain an ability to earn monopoly-type profits--are a virtue that Morningstar assiduously seeks among the more than 1,500 stocks we research, with good reason. Companies boasting wide economic moats, such as  Fidelity National Financial (FNF) or  Moodys  (MCO), earn high returns on capital because they are difficult to compete with--a benefit that readily translates into outsized returns for investors over long periods. Conversely, companies that lack moats lead a hardscrabble existence confronting brutal competition and eking out unappealing returns.

We think the moat concept has broader applicability. In our view, the individual and institutional investors who compete for investment returns can take concrete steps toward widening their "investment moat"--which in this context refers to an ability to consistently outperform their market benchmark of choice. By focusing their efforts on market segments in which they boast a competitive edge, developing private valuation insights and reducing temperament-driven errors that impede rational thinking, we think investors can meaningfully improve their returns over long periods. Although we view these as the three key ingredients for widening an investment moat, we caution that we are offering a framework rather than a prescriptive recipe. Investment moats take many shapes, and we think the most successful investors will be those who can adapt the framework to amplify their unique strengths.