Author: huddaman

Subject: Re: OT: Morningstar

Date: 3/25/2020

Recommendations: 0

Morningstar created an index called "Morningstar Wide Moat Focus Total Return Index". This index uses star ratings (actually they use market value /fair value estimate) to add remove stocks into this index every quarter. And this index has crused the SPY and many other active funds. So I would say it works atleast it did in the past for "Wide moat" universe. Now regarding narrow moat and no moat (I hope you are aware of this metric they apply to their coverage universe of stocks), not based on recent data, but my subjective past analysis, what I found is that their narrow and no moat stocks fair values may be wild, and not track close to reality. I havent studied their Narrow moat index, and I am sure it is there. My theory regarding why wide moat doing well is : Wide moat stocks are established companies. It is easier to predict their cashflows (the get them wrong all the time). It is easier as a whole to be correct most of the time (not all the time). As a result, the technique combined with value approach has done well. BTW, if you simply choose top 5 of their cheapest wide moats e.g. CLB, CMP, WFC, CTVA & ZBH, you wont necessarily do well. What I mean is, this is just 5 out of top 20, and if they are wrong on their forecast of these companies, you are going to wildly underperform. You might want to diversify. Or buy an ETF : MOAT that tracks the above index. Finally, Morningstar also runs two actively managed portfolios I am aware of, Stock and Dividend Investor Basically, what I am suggesting is, dont bet the farm on single pick from M* even if it has a market value/fairvalue ratio of 0.25 (CLB currently). Unless you are feeling lucky!