Q: The wider the moat, the lower the return, right?
A: Yes, that’s correct.
Morningstar’s very own data from 2002 through 2012 shows that “no” moat stocks are the best performers. A former colleague of mine, Morningstar’s Warren Miller noted the following in his January 11, 2013 piece titled, “How Our Stock Star Ratings Have Performed:”
Figure 3 further illustrates the idea that using moat ratings alone will not yield outsized returns. In fact, the wider the moat, the lower the return.
There it is. Go ahead, look at Figure 3 (1). It shows that “no” moat stocks outperform “narrow” moat stocks, which outperform “wide” moat stocks. We don’t think Morningstar is doing anything wrong talking about moats, but we simply believe investors are confused about what performance should be expected just because a company has a “moat.”
Now you know!
(1) http://news.morningstar.com/articlenet/article.aspx?id=578542