The Myth of the Moat

castleandmoatIt’s not that The Moat doesn’t matter in stock selection, it’s that, like most analytical concepts, it doesn’t always matter.

The Moat is a metaphor to describe the protected, fortress-like competitive advantages a company has over other companies; Wal-Mart‘s moat is its size and scale, Amazon‘s moat is its user base and checkout simplicity.

Morningstar, a research and data firm that talks about economic moats a great deal, showed us that in 2009, the moat wasn’t important at all in terms of performance:

source: Morningstar

source: Morningstar

In their estimation, once the next Depression scenario was taken off the table, the most injured, no-moat stocks had the most room to run higher.  This is a result of their underperformance in 2008 when the moat kept more competitively advantaged stocks in better shape.

Will moats matter in 2010?  Guess we’ll see.

Sources:

A Banner Year For No-Moat Firms (Morningstar)