It doesn’t take long to come across the term moat when consuming investing content. For many investors the term can seem nebulous. Moats are the mythical creature of investing. We are told they exist. Some investors see signs of them everywhere. But for most investors – try as we might – identifying a moat seems just out of reach.

The term is generally attributed to Warren Buffett. If Buffett cares about moats than perhaps, we should too. At Morningstar we certainly care about moats. For each of the roughly 1600 shares we cover globally our analysts opine on the existence or lack of existence of a moat. We have a moat committee to add rigor. Former analysts even wrote a book on moats with the self-explanatory title Moats Matter.

A moat is a sustainable competitive advantage. The image of a moat as a body of water to protect a castle is apt as a moat protects a company from competition. To offer effective protection the moat must be sustainable. A company may benefit from a first mover advantage but without the protection of a moat those advantages will be eroded over time by competitors eager to get a piece of an attractive opportunity. A company that our analysts believe will sustain a competitive advantage for 10 years receives a narrow moat rating. A wide moat rating denotes am expected 20-year sustainable advantage.

Here are a few of our top resources to learn what a moat is, how to identify them and why they’re important to finding quality businesses.

How to find a great company to buy: This is a great jumping off point for a deep dive into moats. It has a real-life example of what constitutes a moat, and details the five moat sources that Morningstar have identified.

We popularised moats; here’s the verdict more than 20 years later: Moats are at the core of Morningstar’s equity analysis. John Reckenthaler analyses how investing in companies with moats has aided investors to achieve strong returns – with safety. Lauren Solberg has also put together some hard data on how wide moat stocks have performed against their no moat counterparts.

Four cheap wide moat ASX stocks: A list of current opportunities that are undervalued and can maintain a sustainable competitive advantage for at least the next 20 years.

How to pick stocks like Warren Buffett: Moats are a large part of how Buffett has an investing edge. This video goes through how it fits in with the rest of his investment strategy. We’ve also written on 12 lessons on money and more from Buffett and Munger, and the other benefits of moats, including as a protection against inflation.

Finding the best shares for you: In this three-part Investing Compass episode series, we go through how to find the best shares for you, including how moats can fit into your long-term investment strategy, whatever your investment goals.

Listen for Swipe right for shares: Part 1 on:

 

Listen for Swipe right for shares: Part 2 on:

 

Listen for Swipe right for shares: Part 3 on:

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