Morningstar: The Verdict on Wide-Moat Stocks
Value investing has a number of tenants. One of the more popular items that value investors look for is a durable competitive advantage over peers. This term has been popularized as a “moat.”
A moat can come in a number of ways. A strong brand can offer a moat, as consumers will be willing to pay a slightly higher price compared to a non-brand name. Or a company may have a legal or cost advantage.
For investors, moats tend to offer a slight edge that can lead to much higher returns over time as returns compound.
However, investors need to be aware of a number of potential shortcomings. For instance, a moat is not a guarantee. Changing market conditions could mean that a moat is lost over time. It may even happen quickly depending on how fast an industry changes.
While there are some potential warning signs to watch for, moats have a number of advantages for patient investors. The strongest one in volatile markets is safety. When markets start to drop, companies in financial trouble may face bankruptcy.
But for a strong company with a wide moat, such as Microsoft (MSFT), a market correction can offer long-term investors a solid entry point.
Using wide moats to focus on safety looks like one way to take advantage of the latest market selloff for future profits ahead.